Can Relationship Banking Survive Competition?

“Where competition is present, investors cannot reasonably expect to share in the borrower’s surplus, regardless of the length and strength of the relationship (Rajan,1992; Petersen and Rajan (1994, 1995); Berger and Udell, 1995; Boot, 2000; Boot and Thakor, 2000).”

“In a transactional strategy, the lender does not anticipate repeated interactions with the borrower and, as a result, seeks to at least break even on individual loans (Boot 2000; Berger and Udell 2006).”

“There is also a literature that studies how the expansion of markets affects bank relationships (Boot and Thakor, 2000), and how financial market exuberance might make banking highly procyclical (Shleifer and Vishny, 2010).”

“This paves the way for banks to provide a host of relationship banking services (see Boot and Thakor 2000).”

“Taking a broader view on banks’ business lines, Boot and Thakor (2000) argue that stronger competition will reduce profit margins more in transaction than”

“In the empirical part we analyze di¤erent potential quality variables that banks can use to 5For literature about relationship lending and/or competition in credit markets see for instance Boot and Thakor (2000), Petersen and Rajan (1994), Petersen and Rajan (1995), or Winton (1997).”

“There is extensive theoretical literature concerned with the coexistence of bank lending and direct bond financing (Besanko and Kanatas 1993; Hoshi, Kashyap, and Scharfstein 1993; Chemmanur and Fulghieri 1994; Holmstrom and Tirole 1997; Boot and Thakor 2000; Bolton and Freixas 2000).”

“In order to be able to keep exploiting this information advantage –which may positively affect the probability of repayment (Boot and Thakor, 2000) and negatively affect the loss given default– banks prefer to stay more active in these sectors.”

“…that, in equilibrium, bank portfolios are continuous in project locations, I identify the two projects y∗L and y ∗ R that separate bank portfolios 36 See Boot and Thakor (2000) for an alternative and thorough analysis of a bank’s incentives to specialize in the context of relationship banking.”

“…have resulted in the banks themselves investing less in relationship banking, given previous arguments that there is less incentive for banks to pursue relationship banking when there is less competition between them because of less pressure to differentiate their services (Boot and Thakor 2000).”

“Furthermore, credit rationing in the form of dealing more qualitative credit investments (see Boot and Thakor, 2000), better loan portfolio diversification (see Diamond, 1984) as well as lower costs for the monitoring of their competitors (see Allen and Gale, 2000) can lead to improved financial…”

“Larger banks engaging in “credit rationing” enhance soundness as they pick fewer investments with higher quality (Boot and Thakor 2000).”

“…p-values from the standard t-test and the conditional likelihood ratio (CLR) test proposed by Moreira (2003).25 Moreover, as hypothesis testing 23 Boot and Thakor (2000), Dell’Arriccia and Marquez (2004), and Hauswald and Marquez (2006) offer classical arguments for a positive correlation…”

“This notion of relationship banking, wherein bank monitoring enhances the borrower's project payoff and repayment to the bank, is also consistent with other papers on relationship banking (e.g., Boot and Thakor (2000); see Boot (2000) review).”

“decisions (Stein, 1998; Boot, 2000; Boot and Thakor, 2000).”

“Having a close international banking relationship creates an ownership advantage in terms of lower agency costs stemming from reduced information asymmetries and access to a broad investor clientele (see e.g. Sharpe, 1990 and Boot and Thankor, 2000).”

“It has also been argued that, in concentrated markets, such a transfer of cost savings is inefficient and the savings are additional revenues of the banks ( Boot and Thakor 2000 ).”

“Focusing on the benefits of relationship lending to borrowers Boot and Thakor (2000) argue that the resulting close business ties allow 3 banks to fend off competition from other lenders and transactional debt such as bond markets.”

“…‘‘traditional bank loans and capital market instruments’’ (Lee and Mullineaux 2004) and has features of both ‘‘relationship loans’’ and ‘‘transaction loans’’ (Boot and Thakor 2000), in contrast to conventional public debt, which has diffused ownership structures (Diamond 1991a; Amihud, Garbade,…”

“However, increased capital-market competition also leads, for example, to changes in bank orientation, away from relationship banking towards more transactional banking and more bank industry specialization ( Boot and Thakor, 2000 ).”

“However, by increasing ex-post competition it reduces the value of customer relationships to banks (Figure 6) and banks’ ex-ante desire to form relationships, similar to Petersen and Rajan (1995) or Boot and Thakor (2000).”

“Boot and Thakor (2000) and Fraser, Ghon, Rhee, and Shin (2002) both describe the importance of regulatory restraints on competition to relationship banking.”

“More fundamentally, one should therefore look for ways to clearly separate intermediation and investment from transactions and savings, as not all deposits are held for investment purposes [87].”

“Boot and Thakor (2000) show that a relationship orientation can alleviate these competitive pressures, because it can make a bank more unique relative to its competitors.”

“Foreign banks may be less informed about the activities of local firms (Rueda Maurer (2008), Detragiache, Tressel and Gupta (2008), Giannetti and Ongena (2008) and Giannetti and Ongena (2008)), while intense competition between banks may make relationship banking more or less beneficial (Petersen and Rajan (1995), Boo…”

“Boot and Thakor (2000) show that bank monitoring can better resolve moral hazard problems at the firm’s level.”

“Boot and Thakor (2000) explore the implications for relationship banking of increases in competition both from the capital market and from other commercial banks.”

“18 This “surplus sharing” effect is not present in Boot and Thakor (1999) although, as pointed out to us by Arnoud Boot, an extension of their model also produces a non-monotonic relation between competition in banking and the amount of relationship lending.”

“Boot and Thakor (2000) contrast “relationship banking” with “transaction banking.”

“See also Sharpe (1990), Rajan (1992) and Boot and Thakor (2000).”

“Having market power is important to be able to implement these relationship strategies because it guarantees that the banks will be able to recover their investment in the acquisition of the information (Boot and Thakor 2000 ) and to solve, therefore, the problems of asymmetrical information.”

“…structure and competition on SME financing offers two competing theories: Whereas proponents of the ‘market power’ notion (Elsas, 2005; Boot, 2000; Boot and Thakor, 2000, Ongena and Smith, 2000) contend that concentration decreases firms’ access to credit, advocates of the ‘information…”

“Boot and Thakor [8], indicated that there are a number of factors or challenges that affected or restrained the growth of e-finance.”

“In addition, and equally importantly, a related theoretical literature (e.g., Petersen and Rajan; 1995; Caminal and Matutes, 1997, 2002; Boot and Thakor, 2000) argues that some degree of bank market power may be needed for strong and inter-temporally efficient bank-firm relationships to form.”

“Prior literature argues that lenders invest in industry-specific information production or “sector specialization” (Boot and Thakor, 2000; Dell’Ariccia and Marquez, 2004; Hauswald and Marquez, 2006), such that lenders with higher loan concentrations in a specific industry”

“When Boot and Thakor (2000) introduce competition from capital markets, banks invest more in the relationship because the lower entry into the banking industry means that there are fewer banks to make competing transactional bids.”

“33 Previous literature has supported the claim that the European banking system is more relationship-oriented than the U.S. banking system (Boot and Thakor (2000)).”

“financing relationships (arm’s length vs. relationship lending) varies considerably across firms (e.g., Boot and Thakor (2000) ).”

“This is in line with the prediction of Boot and Thakor (2000) which argues that interbank competition might lead to lower added value of relationship lending for borrowers which mainly rely on relationship lending prior to the increased interbank competition.”

“In fact, as Boot (2000) argued, relationship banking goes beyond lending and includes other services as well.”

“Opposite to Brockman and Unlu (2009)‘s substitute hypothesis that managers of industrial firms pay lower amount of dividends in weak creditor rights countries to reduce agency costs of debt, we find a negative and significant relation between creditor rights index and dividend payouts.”

“1 According to the model proposed by Boot and Thakor (2000), interbank competition erodes relationship banking while capital market competition may enhance it.”

“That is, small banks escape price competition by focusing further on relationship banking in line with Boot and Thakor [44].”

“Related to the paper by Boot and Thakor (2000), Yafeh and Yosha (2000) analyze the effect of competition between banks on the extent to which banks specialize in relationship lending.”