DP15015 Close Competitors? On the Causes and Consequences of Bilateral Bank Competition

Author(s): Ralph de Haas, Liping Lu, Steven Ongena
Publication Date: July 2020
Date Revised: April 2021
Keyword(s): Bilateral bank competition, credit constraints, multimarket contact
JEL(s): D22, D40, F36, G21
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15015

We interview 379 European bank CEOs to identify their banks' main competitors. We then provide evidence on the drivers of bilateral bank competition, construct a novel competition measure at the locality level, and assess how well it explains variation in firms' credit constraints. We find that banks identify another bank as a main competitor in small-business lending when their branch networks overlap, when both are foreign owned or relationship oriented, or when the potential competitor has fewer hierarchical layers. Intense bilateral bank competition increases local credit constraints, especially for small firms, as competition may impede the formation of lending relationships.