Estimating firms’ bank-switching costs

Karolis Liaudinskas and Kristina GrigaitÄ—

No 2021/4, Working Paper from Norges Bank

Abstract: We explore Lithuanian credit register data and two bank closures to provide a novel estimate of firms’ bank-switching costs and a novel identification of the hold-up problem. We show that when a distressed bank’s closure forced firms to switch, these firms started borrowing at lower interest rates immediately and permanently. This suggests that firms were held up and overcharged exante, and reveals the lower bound of their ex-ante switching costs. Opaquer firms were overcharged more, which suggests that information asymmetries significantly contribute to switching costs. In line with banks’ reputational concerns, a healthy bank’s closure revealed no overcharging. To policy-makers, our results suggest potential benefits of distressed banks’ closures.

Keywords: switching costs; lending relationships; hold-up; asymmetric information; bank closures; financial distress (search for similar items in EconPapers)
JEL-codes: D82 E51 G21 G33 L14 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2021
New Economics Papers: this item is included in nep-cfn, nep-com and nep-mac
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https://hdl.handle.net/11250/2758398

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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2021_4

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