Academic journal article International Journal of Business

Lending Competition and Relationship Banking: Evidence from Japan*

Academic journal article International Journal of Business

Lending Competition and Relationship Banking: Evidence from Japan*

Article excerpt

ABSTRACT

The question of whether more competition among banks increases relationship banking, which is predicted to improve credit availability for informationally opaque firms in theory, is a controversial issue in the banking literature. This paper provides evidence for the negative correlation between lending competition and the provision of relationship banking by using firm-level survey data in Japan. This paper raises the question whether fierce interbank competition is always beneficial for small firms.

JEL Classification: D82, G21, L11, L14

Keywords: Relationship Banking; Lending Competition

(ProQuest: ... denotes formulae omitted.)

I. INTRODUCTION

Does increased lending competition improve credit availability for firms dependent on bank lending? A number of empirical studies have been conducted to answer this question, but their answers are mixed. Several studies show the evidence that the increased competition improves credit availability for firms (Black and Strahan, 2002; Cetorelli, 2004; Huang, 2008), while other studies show the evidence supportive of the opposite (Petersen and Rajan, 1995; Bonacorrsi di Patti and Cetorelli, 2004; Beck et al, 2004; Zarutsukie, 2006; Ogura, 2007). The prototypical oligopoly models, such as the Cournot model and the circle-city model, predict that the total credit supply increases as the number of competing banks increases. However, this is not the only story in credit markets because of asymmetric information among lenders as well as that between a borrower and a lender.

Lenders are willing to engage in acquisition of customer-specific information and/or customer-specific services; namely relationship banking (Boot, 2000), aiming at positive rents from informational advantage or product differentiation. Lenders are more willing to offer loans to firms when they can expect larger rents and are inclined to provide relationship banking. One of important determinants of these expected rents is the degree of lending competition a bank faces. Therefore, lending competition can influence the credit availability through the second route, i.e., the likelihood of relationship banking to be served. The mixed finding in the existing empirical studies mentioned above is likely to have come from the difference by datasets in the relative impact of these different two effects, i.e., the oligopoly effect and the relationship banking effect. The purpose of the present study is to provide another evidence on the latter effect; i.e., the impact of lending competition to relationship banking with the data and method different from the existing studies.

The existing theories provide us with mixed conclusions about the impact of lending competition to relationship banking. In a number of theoretical studies that model relationship banking as the acquisition of borrower-specific information by banks, it is shown that the increase in the number of competing banks in a local lending market leads to a reduction in information acquisition by these banks. This is because the additional market share that can be captured by the information advantage over rival banks decreases, and, therefore, it is more difficult to recoup the investment cost for information acquisition when the number of rivals increases (Petersen and Rajan, 1995; Hauswald andMarquez, 2006). On the other hand, several studies that model relationship banking as a provision of borrower-specific consulting or monitoring services to improve the probability of the success of their borrowers' projects show the possibility that a bank is more likely to provide such consulting or monitoring services as the number of competing banks increases in order to fend off the competitive pressure from outside banks (Boot and Thakor, 2000; Dinc, 2000; Yafeh and Yosha, 2001; Marquez and Dell'Ariccia, 2004).

Some researchers resort to empirical studies in order to answer the question of whether or not lending competition promotes relationship banking. …

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