Do banks price discriminate spatially? Evidence from small business lending in local credit markets

In this paper we explore the effects of bank–borrower physical proximity on price and non-price aspects of small business lending in local credit markets. Along the price dimension, our analysis reveals that interest rates increase with bank–borrower distance and decrease with the distance between borrower and other competing banks. Along the quantity dimension, we observe that more distant borrowers are more likely to experience binding credit limits. We also show that the quantity effects of bank–borrower distance are concentrated among less transparent firms. Our findings are consistent with pricing based on marginal costs that reflect information-based factors, and are in contrast to the established paradigm, where banks adopt spatial discriminatory pricing rules when lending to small-sized enterprises.     

Organizational distance and use of collateral for business loans

This paper examines the effect of organizational distance (i.e. distance between the headquarters of the bank that grants a loan and the location of the borrower) on the use of collateral for business loans by Spanish banks on the basis of the recent lender-based theory of collateral [Inderst, R., Mueller, H.M., 2007. A lender-based theory of collateral. Journal of Financial Economics 84, 826–859.]. We find that, for the average borrower, the use of collateral is higher for loans granted by local lenders than by distant ones. We also show that the difference in the likelihood of collateral in loans granted by local lenders, relative to distant lenders, is higher among older and larger firms, than, respectively, younger and smaller firms. We also find that banks use lending technologies that are different for near and for distant firms, in response to organizational diseconomies.     

When arm's length is too far: Relationship banking over the credit cycle

We conduct face-to-face interviews with bank chief executive officers to classify 397 banks across 21 countries as relationship or transaction lenders. We then use the geographic coordinates of these banks’ branches and of 14,100 businesses to analyze how the lending techniques of banks near firms are related to credit constraints at two contrasting points of the credit cycle. We find that while relationship lending is not associated with credit constraints during a credit boom, it alleviates such constraints during a downturn. This positive role of relationship lending is stronger for small and opaque firms and in regions with a more severe economic downturn. Moreover, relationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans.     

Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans

I empirically explore the syndicated loan market, with an emphasis on how information asymmetry between lenders and borrowers influences syndicate structure and on which lenders become syndicate members. Consistent with moral hazard in monitoring, the lead bank retains a larger share of the loan and forms a more concentrated syndicate when the borrower requires more intense monitoring and due diligence. When information asymmetry between the borrower and lenders is potentially severe, participant lenders are closer to the borrower, both geographically and in terms of previous lending relationships. Lead bank and borrower reputation mitigates, but does not eliminate information asymmetry problems.     

The impact of monetary policy on the financing behaviour of firms in the Euro area and the UK

Abstract

According to the ‘broad credit view’ bank-dependent firms are more strongly affected by monetary contractions than firms with access to non-bank forms of external finance. Within the credit view the bank lending channel focuses on the special role of bank loans, and predicts that monetary contractions reduce loan supply to firms facing information problems. However, the ‘relationship lending channel’ argues that, especially in bank-based economies, bank-dependent firms have close ties with banks, which may reduce the sensitivity of their use of bank debt to monetary shocks. The sensitivity of corporate debt structures to changes in the monetary policy stance is analysed using a sample of 22,000 firms in the Euro area and the UK. Evidence is found for the credit view, the relationship lending channel, but not for the bank lending channel.     

Why do small businesses have difficulty in accessing bank financing?

This study investigates bank financing to small and medium-size enterprises (SMEs) and evaluates whether the difficulties of SMEs in accessing bank financing during a period of financial crisis are due to a reduction in the supply of credit, or to a decrease in the demand for credit. The results show that the macroeconomic setting matters: demand effects are unlikely to drive the decline in the stock of bank loans, while the supply of credit causes SMEs difficulties in accessing bank credit. During a crisis period, in particular, an increase in the risk of lenders leads to the reduced supply of credit and credit rationing (i.e. the bank lending channel). In a post-crisis period, SMEs with increased risk and decreased profits have great difficulties in securing bank loans (i.e. the borrower balance sheet channel). Taken together, these results suggest that supply effects initially emerge through the bank-lending channel and then shift to the borrower balance sheet channel over a period of financial crisis.     

Bank interest rates and credit relationships in Italy

When evaluating the performance of a financial system in supporting the investment activity of the corporate sector, a distinction is usually drawn between “banking economies” and “market economies”, the former being characterized by long-term relations between banks and the industrial sector. Although theoretical studies and empirical results seem to agree that lending relationships increase the available quantity of capital to firms, they have little to say on the cost of bank credit: it is not clear whether a close relationship with a main bank would allow the borrower to pay a lower interest rate or expose him to a monopolistic rent. Using a unique data-set reporting detailed information on the evolution over time of individual bank–borrower relationships in Italy, we show evidence that a main bank provides credit at a lower cost and that some competition helps to reinforce the commitment between the borrower and the bank.     

Relationship lending,hierarchical distance and credit tightening: Evidence from the financial crisis

This paper examines the firms’ credit availability during the 2007–2009 financial crisis using a dataset of 5331 bank–firm relationships provided by borrowers’ credit folders of three Italian banks. It aims to test whether a strong lender–borrower relationship can produce less credit rationing for borrowing firms even during a credit crunch period. The results show that exclusivity of the relationship can mitigate the firm credit rationing. We also verify the influence of lending organizational structure during crisis. A new measure of distance in lending technologies has been introduced: the hierarchical distance calculated as the distance between the branch that originates the loan and the location of the hierarchical level responsible for financing decision. Our findings document a negative impact of distance on credit availability, consistent with the idea that proximity facilitates the transmission of soft information.     

Credit rationing in P2P lending to SMEs: Do lender-borrower relationships matter?

This paper studies the role of individual P2P investors that are acquainted with the borrower in mitigating credit rationing in P2P lending to SMEs. I use proprietary data provided by one of the biggest Dutch P2P lending platforms, on which personal acquaintances of the borrower are able to invest before other P2P investors do. I find that P2P investors invest more in loans of borrowers to whom they are personally acquainted. More initial investment by investors acquainted with the borrower is subsequently associated with a higher likelihood of obtaining a second loan from the P2P lender, larger investments by other P2P investors and lower ex post defaults. These results are consistent with informal lenders having superior information or monitoring skills and rational herding following informal investors' investment decisions.     

Bank Lending Standards and Access to Lines of Credit

This paper examines how changes in bank lending standards are related to the availability of bank lines of credit for private and comparable public firms. Overall, we find that access to lines of credit is more contingent on bank lending standards for private than for public firms. The impact of bank lending standards is however asymmetric: while private firms are less likely than public firms to gain access to new lines when credit market conditions are tight, we find no difference between public and private firms in terms of their use or retention of pre‐existing lines. We also find that private firms without lines of credit use more trade credit when bank lending standards are tight, which is suggestive of a supply effect. Overall, the evidence suggests that “credit crunches” are likely to have a disproportionate impact on private firms. However, pre‐existing banking relationships appear to mitigate the impact of these contractions on private firms.     

The ties that bind: Bank relationships and small business lending

The importance of bank relationships for small firms’ ability to raise external finance is well-documented, yet the mechanism through which relationships improve access to capital markets has received little empirical attention. This paper uses hand-collected, proprietary data from a mid-sized bank in the United States to identify the channels that strengthen the relationship between a small business and its bank. In contrast to earlier work that focuses on the role of relationships in alleviating information and incentive problems in lending, I find that the source of value in relationship banking is not limited to enhanced monitoring. Exploiting a unique feature of this dataset, I examine two channels of relationship strength that directly measure the stream of non-lending profits generated from (1) the non-credit services cross-sold to the borrower, and (2) the additional bank clients referred by the borrower. I document that non-lending profitability empirically determines the risk-adjusted terms of lending. In models of loan price that already include both the bank’s proprietary risk rating and traditional risk proxies, non-lending profits significantly improve explanatory power and account for up to half of the total explained variation. Conditional on risk profile, a one-standard deviation increase in aggregate non-lending profits lowers the loan interest rate by 32 basis points and increases access to credit by 26%.     

Beyond the Transaction: Banks and Mortgage Default of Low‐Income Homebuyers

We evaluate the effects of the lending institution and soft information on mortgage loan performance for low‐income homebuyers. We find that even after controlling for the propensity of a borrower to get a loan from a local bank based on observable characteristics, those who receive a loan from a local bank branch are significantly less likely to become delinquent or default than other bank or nonbank borrowers, consistent with an unobserved information effect. These effects are most pronounced for loans originated to borrowers with marginal credit, where soft information may have a stronger effect. These findings support previous research on information‐driven lending, and provide additional explanation for observed differences in mortgage loan performance between bank and nonbank lenders.     

How important are small banks to small business lending?: New evidence from a survey of small firms

Typically, small banks lend a larger proportion of their assets to small businesses than do large banks. The recent wave of bank mergers has thinned the ranks of small banks, raising the concern that small firms may find it difficult to access bank credit. However, bank consolidation will reduce small business credit only if small banks enjoy an advantage in lending to small businesses. We test the existence of a small bank cost advantage in small business lending by conducting the following simple test: If such advantages exist, then we should observe small businesses in areas with few small banks to have less bank credit. Using data on small business borrowers from the 1993 National Survey of Small Business Finance, we find that the probability of a small firm having a line of credit from a bank does not decrease in the long run when there are fewer small banks in the area, although short-run disruptions may occur. Nor do we find that firms in areas with few small banks are any more likely to repay trade credit late, suggesting that such firms are no more credit constrained than firms in areas with many small banks.     

The Choice of Debt Source by UK Firms

We examine the choice of borrowing source among public debt, syndicated bank loans, bilateral bank loans and non‐bank private debt. Using a sample of 400 non‐financial firms over the period 2000–2012, we find strong support for the reputational theory of borrowing source. Larger firms are more likely to borrow in public debt markets. Bank dependent firms are less likely to borrow in public debt markets and choose between bank and non‐bank private debt based on maturity, collateral available to lenders and other firm characteristics. These results are consistent with the role of borrower reputation being the primary determinant of borrowing source for UK listed firms.     

Does the quality of lender–borrower relationships affect small business access to debt? Evidence from Canada and implications in China

The literature on corporate governance and entrepreneurial finance suggests that when lender–borrower relationships are of longer duration, they tend to be more successful in solving the informational asymmetry problems related to small business debt financing. Using the data from Canadian financial markets, this study first confirms this finding, insofar as the quality of lender–borrower relations is affected by traditional solutions to agency conflicts, lender requirements, and negative changes in the borrowing terms offered by lenders. However, in testing this conclusion further, we empirically demonstrate that, counter-intuitively, the quality of the lender–borrower relationship does not affect a small firm's access to debt, or change the terms of borrowing. We also show similar supporting evidence from lenders to small firms in China, where business relationships involving “guanxi” (or connections that are beneficial for both parties) are commonly expected to influence access to debt. The robustness of the study's results is shown by the data from numerous lending institutions in a province of China.     

地理距离、契约设计与企业内部资本市场借贷风险防控——来自中国企业集团内部借贷交易的证据

地理因素对保持距离型市场交易的影响已被大量文献证实,但系统考察地理因素是否以及如何影响企业内部经济活动的研究仍十分匮乏。基于手工搜集整理的企业集团内部委托贷款这一独特数据,我们实证考察了地理距离对企业集团内部借贷契约设计的影响及相关的风险防控问题。实证结果显示,借贷距离越远,针对借款者的契约设计越严苛,不仅贷款者更可能要求借款者提供抵押担保,而且对资金用途施加限制的概率也大幅增加。进一步研究发现,与地理距离阻碍了信息搜集和监督的经济直觉一致,距离对企业内部借贷契约严苛性的推高作用会因为借贷双方之间的信息摩擦问题差异而改变。而且,基于借贷违约信息的检验结果表明,作为应对信息不对称的机制,动态调整契约严苛性这一精巧契约设计有效降低了企业内部贷款违约风险。本文不仅增进了对地理因素影响企业内部资本配置的认识,而且加深了对企业内部借贷契约设计的理解,从而对如何有效防控企业内部资本市场运作风险具有启示意义。     

Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans

Using a data set that records banks’ ongoing requests of information from small commercial borrowers, we examine when banks use financial statements to monitor borrowers after loan origination. We find that banks request financial statements for half the loans and this variation is related to borrower credit risk, relationship length, collateral, and the provision of business tax returns, but in complex ways. The relation between borrower risk and financial statement requests has an inverted U‐shape; and tax returns can be both substitutes and complements to financial statements, conditional on borrower characteristics and the degree of bank–borrower information asymmetry. Frequent financial reporting is used to monitor collateral, but only for non–real estate loans and only when the collateral is easily accessible to lenders. Collectively, our results provide novel evidence of a fundamental information demand for financial reporting in monitoring small commercial borrowers and a specific channel through which banks fulfill their role as delegated monitors.     

Corruption in bank lending to firms: Cross-country micro evidence on the beneficial role of competition and information sharing

Building on the important study by Beck, Demirguc-Kunt, and Levine [2006. Bank supervision and corruption in lending. Journal of Monetary Economics 53, 2131-2163], we examine the effects of both borrower and lender competition as well as information sharing via credit bureaus/registries on corruption in bank lending. Using the unique World Bank data set (WBES) covering more than 4,000 firms across 56 countries with information on credit bureaus/registries, assembled by Djankov, McLiesh, and Shleifer [2007. Private credit in 129 countries. Journal of Financial Economics 84, 299–329], and bank regulation data collected by Barth, Caprio, and Levine [2006. Rethinking Bank Regulation: Till Angels Govern. Cambridge University Press, New York] to measure bank competition and information sharing, we find strong evidence that both banking competition and information sharing reduce lending corruption, and that information sharing also helps enhance the positive effect of competition in curtailing lending corruption. We also find that the ownership structure of firms and banks, legal environment, and firm competition all exert significant impacts on lending corruption.     

地理距离、契约设计与企业内部资本市场借贷风险防控——来自中国企业集团内部借贷交易的证据

地理因素对保持距离型市场交易的影响已被大量文献证实,但系统考察地理因素是否以及如何影响企业内部经济活动的研究仍十分匮乏。基于手工搜集整理的企业集团内部委托贷款这一独特数据,我们实证考察了地理距离对企业集团内部借贷契约设计的影响及相关的风险防控问题。实证结果显示,借贷距离越远,针对借款者的契约设计越严苛,不仅贷款者更可能要求借款者提供抵押担保,而且对资金用途施加限制的概率也大幅增加。进一步研究发现,与地理距离阻碍了信息搜集和监督的经济直觉一致,距离对企业内部借贷契约严苛性的推高作用会因为借贷双方之间的信息摩擦问题差异而改变。而且,基于借贷违约信息的检验结果表明,作为应对信息不对称的机制,动态调整契约严苛性这一精巧契约设计有效降低了企业内部贷款违约风险。本文不仅增进了对地理因素影响企业内部资本配置的认识,而且加深了对企业内部借贷契约设计的理解,从而对如何有效防控企业内部资本市场运作风险具有启示意义。     

Bank competition and the cost of bank loans

I comprehensively study the effect of bank competition on the cost of bank loans using U.S. bank loan data from 1995 to 2010. The cost of bank loans is analyzed with regard to loan spreads and covenant intensity. I show that loan spreads and covenant intensity are negatively related to bank competition. I also find that non-investment grade and financially constrained firms benefit more from bank competition than investment grade and financially unconstrained firms do. Lenders with low market power are more willing to reduce loan price than lenders with high market power in competitive lending markets. The results suggest that lenders give favorable loan terms to borrowers in competitive loan markets.