Can Relationship Banking Survive Competition?

“Yet, entry policies may matter more than actual entry in creating a competitive environment [Boot and Thakor (1997, 2000)].”

“For example, transaction lending is viewed as arms-length finance focusing on that particular transaction rather than being aimed at an information-intensive relationship with a customer (Boot and Thakor, 2000).”

“However, under a different theoretical model of relationship lending, greater concentration may be associated with less credit availability using this technology (Boot and Thakor 2000).”

“Boot and Thakor (2000) explore the impact of markets on banks.”

“The Boot and Thakor (2000) model predicts that when banks face higher competition from non-banks, they invest more in increasing the value of their relationship loans; Degryse and Ongena (2007) provide supporting empirical evidence.”

“80 which is significant at the 1 percent level.(18) Overall, the multivariate results show that even after controlling for various loan, market, and borrower-specific characteristics, borrowing from relationship lenders is associated with significantly lower spreads, consistent with relationships providing benefits to…”

“Anecdotal evidence such as the quote by Stiglitz in the introduction suggests that there are some inherent attributes of foreign banks that limit their scope in emerging economies.”

“Interpreting intermediaries at different locations on the circle as offering different but competing debt products, our results are in line with Boot and Thakor (2000), who find that growing competition from capital market debt also increases a bank’s investment in specialization.19 Our model,…”

“Boot and Thakor (1996) argue that banks may compete on a transactions-oriented basis in economies with weak capital markets, but compete for relationship lending in an economy with strong capital markets.”

“Second, it is assumed that larger banks tend to engage in “credit rationing” since fewer credit investments of a higher quality will increase the return of the singular investment and hence foster financial soundness (Boot and Thakor, 2000).”

“Boot and Thakor (2000) suggest that larger banks tend to engage in “credit reputation/rating” because making fewer high-quality credit investments can increase the return of individual investments and thereby encourage financial soundness.”

“…terms) (Berger and Udell, 1992; Berlin and Mester 1999); a second strand underscoring more the monitoring role of R banks (Holmstrom and Tirole 1997, Boot and Thakor 2000, Hauswald andMarquez 2000); and a third strand playing up the greater screening abilities (of new loan applications) of R-banks…”

“On the other hand, it can reduce the incentive of the financiers to monitor the exporter, thus exacerbating information asymmetries and credit rationing (Petersen and Rajan, 1994; Boot and Thakor, 2000).”

“Zingales, 1998; Boot and Thakor, 2000; Berger et al. , 2004).”

“Thus, results for the 1,000 bank subsample support our other results. 40. For empirical evidence on these trends see Boyd and Gertler (1994) and Houston and James (1996).”

“…collateral is less likely in more concentrated credit markets but concentration seems to lower the incentives to invest in information, in line with Boot and Thakor (2000) who predict higher investments in relationship specific information and assets as competition in the credit market increases.”

“Similarly a model of this kind can be useful in analyzing the impact of competition on relationship lending, and may shed some light on the evolution of banking relationships, as well as on their future [see Boot and Thakor (2000) for an analysis of this issue].”

“…and soft information can provide advantages in borrower screening and can reduce information asymmetries in banking — see Petersen and Rajan (1994); Boot and Thakor (2000); Berger and Udell (2002); Petersen (2004); Berger, Miller, Petersen, Rajan and Stein (2005); Stein (2002), Karlan(2007);…”

“Through repeat lending banks reduce information asymmetries and build up proprietary information about borrowers (Rajan 1992; Boot 2000; Boot and Thakor 2000).”

“36 Increased competition in banking can theoretically diminish the quality and nature of relationship lending (Petersen and Rajan 1995, Boot and Thakor 2000, Dinc 2000, and Ceterelli and Peretto 2000), but the empirical evidence is mixed.”

“As Boot and Thakor (2000) emphasize, the finance literature tends to identify relationship lending with private finance (bank loans and private placements) and transactions lending with public finance (capital market debt). 1 A large literature has developed which addresses the issue of borrower choice between the two…”

“For example, greater bank competition may weaken screening incentives (Boot and Thakor 2000) and lead to excessive risk taking (Allen and Gale 2000).”

“For example, Acemoglu and Zilibotti (1997), Allen and Gale (1997, 1999), Boot and Thakor (1997, 2000), Dewatripont and Maskin (1995), Holmstrom and Tirole (1993), and Rajan (1992) argue that banks have a comparative advantage in reducing the market frictions associated with financing standardized,…”

“nature of banking and induce banks to become more relationship-oriented (Boot and Thakor, 2000).”

“Therefore, information-related innovation can erode the competitive advantage of banks linked to soft information that is accumulated over time in the context of relationship banking (Berger et al., 2005; Boot, 2000; Botsch and Vanasco, 2019).”

“That is, venture capitalists are \relationship ¯nanciers" (e.g. Boot and Thakor (2000) and Rajan (1992)).”

“Boot and Thakor (1997) suggest that corporate debt may be classified into ‘relationship’ loans and ‘transaction’ loans.”

“Fischer (1990), Sharpe (1990), Rajan (1992), Petersen and Rajan (1995) and Boot and Thakor (2000) ).”

“3 Boot and Thakor (2000) extensively revisit the presumed incompatibility between competition and the nature of relationship financing.”

“Other studies on relationship lending suggest that firms operating in concentrated as opposed to competitive markets have easier access to funds (Petersen and Rajan, 1995; Boot and Thakor, 2000; Strahan and Weston, 1998; Bonaccorsi di Patti and Gobbi, 2001).”

“…literature that relationships and soft information facilitate advantages in screening and reductions in moral hazard (Petersen and Rajan (1994), Boot and Thakor (2000), Berger and Udell (2002), Petersen (2004), Berger, Miller, Petersen, Rajan, and Stein (2005), Stein (2002), Karlan (2007),…”

“On the other hand Boot and Thakor (2000) argue that more interbank competition leads to more relationship lending.”

“Large complex banks are not considered to engage in relationship lending because they are at a competitive disadvantage when information about individual investment projects is innately soft (Boot and Thakor, 2000; Stein, 2002).”

“An extreme case of this “dependency” is relationship lending (Mayer 1988; Sharpe 1990; Rajan 1992; Boot and Thakor 2000).”

“Further theoretical work created the foundations for a more focused examination of bank monitoring (e.g., Sharpe 1990; Diamond 1991; Rajan 1992; Boot and Thakor 2000; and Hauswald and Marquez 2006).”

“In contrast, Boot and Thakor (2000) show that banks, as a response to more intense competition, resort to relationship banking to preserve rents that are evaporating especially in the transaction banking business.”

“obtained in the process of lending ( Boot and Thakor 1994, 2000 ).”

“On the other hand, Boot and Thakor (2000) argue that increased competition may induce banks to invest relatively more in relationships, as the return on relationship over transaction lending improves.”

“influence the nature of the firm-bank relationship ( Boot and Thakor 2000, Petersen and Rajan”

“…’hard’ quantitative data such as financial accounts, denoted usually as transaction lending, or more on qualitative information, which is mainly referred to as relationship lending, depends on the types of clients and the environment in which the banks operate (Boot, 2000; Boot and Thakor, 2000).”

“In this way they can create a competitive edge that helps insulate themselves from pure price competition of outside banks (Boot and Thakor, 2000; Yafeh and Yosha, 2001; Dell’Ariccia and Marquez, 2004; Hauswald and Marquez, 2006). The empirical implications of the strategic theory of relationship lending is that great…”

“…through qualitative asset transformation (QAT)—a process whereby the nature of a bank’s assets is typically different in many dimensions from the nature of its liabilities (see Bhattacharya & Thakor 1993; for more on QAT as an essential part of relationship banking, also see Boot & Thakor 2000).”

“Following Boot and Thakor (2000), we assume that a relationship loan allows the lender to become deeply involved with the project and enhance the project payoff at t = 2 if it is an informationally-opaque good project; the payoff enhancement, which may be due to the bank’s “sector specialization,”…”

“If the local lender also holds loans from other local businesses, she may also know more than any individual borrower, because she knows where the borrower’s local competitors are headed (Boot and Thakor, 2000).”

“S = S(M, r) = Z D k(D+E) rj −∞ (rj − k(D +E) D v)g(v)dv, (6)”

“Second, bank capital has been shown in the literature to be an important factor in bank lending and liquidity creation (e.g., Boot and Thakor, 2000; Berger and Bouwman, 2009).”

“7 See Boot and Thakor (2000) for further discussions on the bank-capital market competition and the inter-bank competition.”

“…intermediaries as a means of preserving strategic advantage in product markets and conserving resources devoted to information production when issuers are privately informed about their quality (see Petersen and Rajan (1994, 1995), Boot and Thakor (2000), Anand and Galetovic (2000)).”

“4 As an alternative to the approach here, Boot and Thakor (2000) propose that banks could seek to protect their rents against competitive forces by engaging in lending that focuses on building deeper relations with borrowers.”

“One issue is whether or not increases in capital market competition for bank loans, which abolishment of the regulations would induce, lead to a reduction in relationship banking (Boot and Thakor, 2000; Fraser et al., 2002).”

“, Diamond (1984), Boyd and Prescott (1986), Ramakrishnan and Thakor (1984). Highlighting the role of banks in mitigating informational problems, James (1987), Lummer and McConnell (1989), Shockley and Thakor (1992), and Billet et al.”

“…and Rajan (1995) conclude that greater competition reduces lending rents for banks and hence contributes to diminish their investment in lending relationships, Boot and Thakor (2000) extend this analysis by considering that this result is observed if banks are only engaged in relationship lending.”