BANKS' DIVERSIFICATION, CROSS-SELLING AND THE QUALITY OF BANKS' LOANS

Stefania Cosci, Valentina Meliciani and Valentina Sabato

Manchester School, 2009, vol. 77, issue s1, pages 40-65

Abstract: In this paper we model and empirically test the impact of banks' shift towards financial services on their screening activity and on the quality of their loans. We present a model where it is easier to sell services to positively evaluated loan applicants and we show that the larger the banks' income from services, the lower their optimal screening effort. This prediction is consistent with the empirical evidence based on a panel of European banks and showing that the quality of banks' loans decreases with the share of commission income (a proxy for income from services). Copyright © 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd and The University of Manchester.

Date: 2009

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