Banking on Deposit Relationships: Implications for Hold-Up Problems in the Loan Market

Jin Cao, Emilia Garcia-Appendini and Cédric Huylebroek
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Jin Cao: Norges Bank - Research Department; CESifo (Center for Economic Studies and Ifo Institute)
Emilia Garcia-Appendini: Norges Bank; University of St. Gallen - School of Finance; Swiss Finance Institute
Cédric Huylebroek: KU Leuven - Faculty of Economics and Business

No 24-64, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: By lending to a firm, inside banks gain an informational advantage over outside banks, enabling them to hold up borrowers and extract informational rents. Using unique data on firm-bank deposit and lending relationships in Norway, we show that deposit relationships between firms and outside banks mitigate inside banks’ informational advantage, thereby attenuating hold-up. This result holds using quasi-random variation in deposit relationships induced by the deposit insurance threshold, and is driven by the information provided by firms’ deposit account activities to outside banks (not cross-selling). Overall, our paper offers the first evidence that deposit relationships impact lender competition.

Keywords: Deposit relationships; Hold-up problems; Lender competition; Lender switching; Information asymmetries (search for similar items in EconPapers)
JEL-codes: D82 G21 L10 (search for similar items in EconPapers)
Pages: 96 pages
Date: 2024-03
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2464

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