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

Elena Carletti (), Vittoria Cerasi and Sonja Daltung

No 04-15, Papers from Sonderforschungsbreich 504

Abstract: This paper analyses banks' choice between lending to firms in exclusive relationships and sharing financing with other banks in a context where both firms and banks are subject to moral hazard problems, and bank monitoring is essential for financing to take place. Multiple-bank lending is optimal whenever the benefit of greater diversification in terms of higher per-project monitoring dominates the costs of free-riding problem and duplication of efforts. The model predicts a greater use of multiple-bank lending when banks are small relative to the size of investment projects, when firms are less profitable, and when poor financial integration, strict regulation and inefficient judicial systems make monitoring more costly. These results are consistent with some empirical observations concerning small business lending and, to some extent, with the formation of syndicates.

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)
Date: 2004
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Citations: View citations in EconPapers (6)

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https://madoc.bib.uni-mannheim.de/2729/1/dp04_15.pdf

Related works:
Journal Article: Multiple-bank lending: Diversification and free-riding in monitoring (2007)
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)
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