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Can Relationship Banking Survive Competition?
Author(s) -
Boot Arnoud W. A.,
Thakor Anjan V.
Publication year - 2000
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00223
Subject(s) - loan , competition (biology) , business , underwriting , financial system , monetary economics , database transaction , value (mathematics) , capital (architecture) , economics , finance , ecology , biology , history , archaeology , machine learning , computer science , programming language
How will banks evolve as competition increases from other banks and from the capital market? Will banks become more like capital market underwriters and offer passive transaction loans or return to their roots as relationship lending experts? These are the questions we address. Our key result is that as interbank competition increases, banks make more relationship loans, but each has lower added value for borrowers. Capital market competition reduces relationship lending (and bank lending shrinks), but each relationship loan has greater added value for borrowers. In both cases, welfare increases for some borrowers but not necessarily for all.