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A Darker Side to Decentralized Banks: Market Power and Credit Rationing in SME Lending

Rodrigo Canales () and Ramana Nanda ()
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Rodrigo Canales: Yale University

No 08-101, Harvard Business School Working Papers from Harvard Business School

Abstract: We use loan-level data to study how the organizational structure of banks impacts small business lending. We find that decentralized banks ? where branch managers have greater autonomy over lending decisions ? give larger loans to small firms and those with "soft information". However, decentralized banks are also more responsive to their own competitive environment. They are more likely to expand credit when faced with competition but also cherry pick customers and restrict credit when they have market power. This "darker side" to decentralized banks in concentrated markets highlights that the level of local banking competition is key to determining which organizational structure provides better lending terms for small businesses.

Keywords: banking; bank structure; soft information; small business lending (search for similar items in EconPapers)
JEL-codes: E44 G21 L26 L43 M13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn and nep-ent
Date: 2008-06, Revised 2011-08
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Journal Article: A darker side to decentralized banks: Market power and credit rationing in SME lending (2012) Downloads
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