Can Relationship Banking Survive Competition?

“See Boot and Thakor (2000) for a model of value-added relationship lending. thus freezes up even though investors are willing to fund banks.”

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

“lending, going forward ( Boot and Thakor 2000; DeYoung, Hunter, and Udell 2004).”

“To achieve this, MFIs use relationship lending (Boot & Thakor, 2000)—also known as relational banking—a lending approach under which “lenders acquire information over time through contact with the firm, its owner, and its local community on a variety of dimensions, and use this information in their…”

“Relationship banking is a banking mode in which banks collect proprietary information about their borrowers through sequential transactions (Boot, 2000; Boot and Thakor, 2000).”

“From a theoretical perspective, Boot and Thakor (2000) suggest in their model that as interbank competition increases, banks make more relationship loans; however, each loan has less added value for borrowers. In contrast, a higher competition in the capital market (bondsmarket) reduces relationship lending, although…”

“repayment obligation in exchange for higher repayment later (Boot and Thakor (2000)).”

“Another strand of the literature analyses the costs and benefits of lending relationship (Boot, 2000; Boot and Thakor, 2000). Other relevant papers are those dealing with the use of covenants to reduce agency costs in the bank loan or public debt markets. For example, Bradley and Roberts (2004) discuss the role of res…”

“In addition, Ergungor (2004) extends the study of Boot and Thakor (2000) and proposes a view that bank's lending techniques are either relationship-based or transaction-based.”

“This seems natural in our framework, given the relatively long-term nature of the bank’s core business (Allen and Gale, 1997; Boot, 2000), which implies that some of the bank’s core business’ funding may predate its involvement in side activities.”

“The soft-budget-constraint problem is related to the potential lack of toughness in enforcing contracts due to the ex post distribution of ‘bargaining power’ linked with relationship banking proximity (see Boot, 2000).”

“In Boot and Thakor (2000) banks make both relationship and transaction (or arm's-length) loans, and face competition from the capital market.”

“Boot and Thakor (2000) argue, for example, that competition forces banks to focus on activities that are less prone to price competition, such as relationship banking. Dell’Ariccia and Marquez (2004) show that competition also increases sector specialization.”

“that reduces the own price elasticity of demand and creates price differences in the market ( Boot and Thakor (2000) ).”

“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.”

“Boot and Thakor (2000) show that banks may refocus on relationship lending in order to survive in the face of interbank competition, because this allows banks to shield their rent better. However, we show that a relationship banking orientation can increase ex ante competition in order to capture more new clientele so…”

“14See Boot and Thakor (2000) for a theoretical analysis of how relationship banking is affected by changes in capital market competition.”

“The idea of disagreement based on multiple heterogeneous beliefs has been used to examine a variety of issues, including the relationship between financial innovation and financial crises (Thakor, 2012), the theory of the firm (Van den Steen, 2010a), formalizing the notion of leadership and managerial vision (Van den…”

“On the other hand, several studies (Boot and Thakor, 2000; Dell’Ariccia and Marquez, 2004; Hauswald and Marquez, 2006) emphasize the strategic nature of lending relationships, showing that banks may increase relational lending to informationally opaque firms to create a competitive edge that may…”

“…borrowers (Rajan (1992), Von Thadden (1995), and Bolton, Freixas, Gambacorta, and Mistrulli (2013)), is better able to monitor such firms (Holmstrom and Tirole (1997), Boot and Thakor (2000)), insures relationship borrower against shocks (Berger and Udell (1992), Berlin and Mester (1999)).”

“Boot and Thakor (2000) predict that increased interbank competition (as opposed to competition driven by capital markets or disintermediation) renders relationship lending more attractive for banks since it provides better insulation against price competition (see also Elsas 2005).”

“…(1977) seem a suitable model.41 Instead, the extensive literature on relationship banking (e.g., Allen, 1990, Ramakrishnan and Thakor, 1984, and Boot and Thakor, 1996) suggests oligopolistic competition for differentiated products in the market for A’s services.42 Studies of depositor services…”

“that the bank can charge ex post high interest rates (Sharpe, 1990). Therefore, once the borrower is informationally captured by the bank, it becomes reluctant to borrow from the bank as bank borrowing becomes costly. (Sharpe (1990), Rajan (1992), Boot (2000)) According to Ongena and Smith (2000) and Rajan (1992) enga…”

“A syndicated loan has the characteristics of traditional, relationship-based bank financing as well as those of transaction-based, bond financing (Boot and Thakor, 2000). Simons (1993) argues that diversification is the primary motive for syndication.”

“In Boot and Thakor (2000) banks determine the allocation of their lending capacity across relationship and arm’s-length or “transaction” lending.”

“Entrepreneurial startups, especially those sponsored by private sources like venture capital funds and business angels, play a significant role in driving innovation [13, 14, 28, 54].”

“Instead, in investment banks, relationships with customers conclude when investments expire and are hardly renewed (Boot & Thakor, 2000).”

“Another issue is related to the fact that our statistical approach supposes that the credit cycle is a regular and stationary process by definition, which is criticized by Borio (2014). 26Despite some statistically distinctive features, the BK filter is in line with the Christiano and Fitzgerald (2003) filter.”

“I am also grateful to Radha Gopalan, David Matsa, Guy Michaels, Todd Milbourn, Anjan Thakor, Andrey Ukhov (discussant at 2008 AFA meetings) and seminar participants at the Olin School of Business (Washington University), New York Federal Reserve Bank, Federal Reserve Board of Governors, Kelley School of Business (Indi…”

“A re ‐ emergence of merchant banking competition by increasing its relationship intensity (Boot and Thakor, 2000).”

“5See also Boot and Thakor (2000) for evidence on the reallocation effects of increases in competition.”

“19 See D’Hulster (2009) 20 Shin and Adrian (2008) 21 See Caballero and Krishnamurthy (2009); see also Borio and Lowe (2002). 22 Turner (2010) 23 Geanakoplos (2010b, 1–65) 24 Albertazzi and Gambacorta (2009, 393–409)”

“, Fudenberg and Tirole 1984, Bulow et al. 1985, Cabral and Villas-Boas 2005); that is, a positive strategic effect may offset the direct negative impact. In particular, Bulow et al. (1985) and Cabral and Villas-Boas (2005) show this in the context of multimarket and multiproduct competition, where there are cost or de…”

“7 See, Berger and Udell (1995, 2002), Petersen and Rajan (1995), Boot (2000), Boot and Thakor (2000) and Berger et al . (2005).”

“Other studies 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).”

“Evidence of market segmentation is widespread and dates back to the classic “preferred habitat” hypothesis of the term structure of interest rates (Modigliani free-riding problem present with many bondholders (Diamond 1984; Holmstrom and Tirole 1997; Boot and Thakor 2000; Sufi 2007).”

“This finding is a confirmation of the results reported by Petersen and Rajan (1995), Boot and Thakor (2000) , and Black and Strahan (2002), all of whom found that increased competition has a negative impact on the entrepreneur.”

“A borrower’s project has a return of (3)See Boot and Thakor (2000) and Ongena and Smith (2000) for reviews of relationship banking.”

“If there are complementarities between issuing equity and bonds, then the number of years a firm has been listed on the stock market may indicate the recognition that a firm receives when it issues; it may also indicate the relationships a firm has built up with banks (see Boot and Thakor, 2000). The financial conditi…”

“In order to reduce their risk exposure, banks can ration SME credit and develop a politic of arm’s length debt (Berger and Udell, 2002; Boot and Thakor, 2000; Karceski, et al., 2005).”

“20 Hoshi, Kashyap, and Sharfstein (1990), Sharpe (1990), Gertner and Scharfstein (1991), Petersen and Rajan (1994), Boot (2000), Boot and Thakor (2000), Lehmann and Neuberger (2001). Rajan (1992) addresses the capture problem. See Flandreau (2003a) for a discussion of relationship banking in 19-century international f…”

“…2005; Djankov, McLiesh and Shleifer 2007), while a different literature has stressed the role of relationship banking and individual reputation mechanisms (Petersen and Rajan 1994, Berger and Udell 1995, Boot 2000, Boot and Thakor 2000, Ongena and Smith 2000 and 2001, Degryse and Ongena 2005).”

“…we do not add a layer of monitoring that is an important rationale for the existence of banks (Diamond 1984), and whose primary function is to increase the success probability of the banks’ assets (Holmström and Tiróle 1997; Boot and Thakor 2000; Allen et al. 2011; Dell’Ariccia et al. 2014).”

“In contrast, the predictions in Boot and Thakor (2000) are more differentiated: While they acknowledge the existence of the effect of increased rent sharing with borrowers and they also argue that banks”

“For reviews of this literature, see Boot (2000), Degryse and Ongena (2008), and the meta-analysis by Kysucky and Norden (2016).”