Discussion Paper Details
Please find the details for DP1592 in an easy to copy and paste format below:
Title: Can Relationship Banking Survive Competition?
Author(s): Arnoud W A Boot and Anjan Thakor
Publication Date: March 1997
Keyword(s): Commercial Banking, Financial System Design and Investment
Programme Area(s): Financial Economics
Abstract: We develop a model of the banking firm that is intended to reflect contemporary trends in the evolution of banks. In particular, we focus on the effects of both interbank and capital market competition on the role of banks in funding corporations. In our model, banks can choose to provide loans that are similar to capital market funding (transaction loans) or loans that involve unique bank-specific services (relationship loans). Borrowers can choose one of these two types of bank loans or directly access the capital market. Our key result is that, contrary to what many believe, a bank?s optimal response to increased competition is to expand relationship lending relative to its transaction lending. The behaviour of the absolute level of relationship lending with respect to increasing competition is non-monotone. Initially, an elevation in competition leads to an increase in the expected level of relationship lending, but then the expected level of relationship lending falls as competition rises further. Moreover, the viability of relationship banking depends significantly on the reputational quality of banks.
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Boot, A and Thakor, A. 1997. 'Can Relationship Banking Survive Competition?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1592