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

Elena Carletti (), Vittoria Cerasi () and Sonja Daltung ()
Additional contact information
Elena Carletti: Center for Financial Studies, Taunusanlage 6, D-60329 Frankfurt, Germany
Sonja Daltung: Sveriges Riksbank, Research Department, 103 37 Stockholm, Sweden

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

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)
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-fmk
Date: 2004-01-18
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Related works:
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)
Journal Article: Multiple-bank lending: Diversification and free-riding in monitoring (2007)
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