Ari Hyytinen and Otto Toivanen
"Monitoring and market power in credit markets"
JEL codes: D21, G21, L15
Keywords: banks, credit losses, information acquisition, human capital, location, market power mortgage loans, price discrimination, discriminating monopoly
Abstract: Whether or not banks
are engaged in monitoring of customers (information acquisition) may have
important consequences to the whole economy. Theory suggests an inverse
relation between both average loan interest rates and credit losses, and banks’
investments in monitoring. In contrast, investments in market power result in a
direct relation. These predictions are tested using panel data on Finnish local
banks. We find evidence that banks’ investments in branch network density and
human capital (personnel) contribute more to monitoring than to market power.
We also find that managing the money transactions of customers enables banks to
better control risks in their lending.
Pre-publication pdf copy; Appendix.