Multiple-bank lending: Diversification and free-riding in monitoring

Vittoria Cerasi and Sonja Daltung

No 2004/18, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: This paper analyzes banks' choice between lending to firms individually and sharing lending with other banks, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending is optimal whenever the benefit of greater diversification in terms of higher monitoring dominates the costs of free-riding and duplication of efforts. The model predicts a greater use of multiple-bank lending when banks are small relative to investment projects, firms are less profitable, and poor financial integration, regulation and inefficient judicial systems increase monitoring costs. These results are consistent with empirical observations concerning small business lending and loan syndication.

Keywords: individual-bank lending; multiple-bank lending; monitoring; diversification; free-riding problem (search for similar items in EconPapers)
JEL-codes: D82 G21 G32 (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Multiple-bank lending: Diversification and free-riding in monitoring (2007)
Working Paper: Multiple-bank lending: diversification and free-riding in monitoring (2004)
Working Paper: Multiple-bank lending: diversification and free-riding in monitoring (2004)
Working Paper: Multiple-Bank Lending: Diversification and Free-Riding in Monitoring (2004)
Working Paper: Multiple-bank lending: diversification and free-riding in monitoring (2004)
Working Paper: Multiple-bank lending: diversification and free-riding in monitoring (2004)
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