DP4543 The Impact of Competition on Bank Orientation and Specialization

Author(s): Hans Degryse, Steven Ongena
Publication Date: August 2004
Keyword(s): bank industry specialization, bank orientation, competition, lending relationships
JEL(s): G21, L11, L14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4543

How do banks react to increased competition? Recent banking theory offers conflicting predictions about the impact of competition on bank orientation - i.e., the choice of relationship based versus transactional banking - and bank industry specialization. We empirically investigate the impact of interbank competition on bank branch orientation and specialization. We employ a unique dataset containing detailed information on bank-firm relationships and industry classification. We find that bank branches facing stiff local competition engage considerably more in relationship-based lending and specialize somewhat less in a particular industry. Our results illustrate that competition and relationships are not necessarily inimical.