The effect of bank-firm relationships on competition in the banking sector
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School of Business |
Bachelor's thesis
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en
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28+3
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This paper is a literature review examining how existing bank-firm relationships affect a competitive situation. Bank-firm relationships exist due to the presence of asymmetric information in the market and are formed when banks are continually in touch with the same borrowers. Two theoretical models are studied. The Diamond’s model justifies the existence of a bank as a financial intermediary due to lower monitoring costs and diversification. The Stiglitz-Weiss model adds to the theoretical background by rationalizing the existence of credit rationing in financial markets. It was found that bank-firm relationships can under different circumstances be both, beneficial for both parties and destructive through hampering competition. Based on existing literature, two effects on competition are outlined. Bank-firm relationships (i) create barriers to entry for new banks and (ii) grant a partial monopoly power to individual banks, so that mobility between banks is lowered. Both effects are found in empirical studies but the severeness of the problem varies depending on the level of asymmetric information and market’s characteristics. A high level of asymmetric information prevents even partial sharing of informational capital between banks, which complicates the problem further.Description
Thesis advisor
Murto, PauliToivanen, Otto