Research Discussion Papers, Bank of Finland
No 9/2000:
Monitoring and Market Power in Loan Markets
Ari Hyytinen ()
and Otto Toivanen
Abstract: Whether or not banks are engaged in ex ante monitoring of
customers may have important consequences for the whole economy. We
approach this question via a model in which banks can invest in either
information acquisition or market power (product differentiation). The two
alternatives generate different predictions, which are tested using panel
data on Finnish local banks. We find evidence that banks’ investments in
branch networks and human capital (personnel) contribute to information
acquisition but not to market power. We also find that managing customers’
money transactions enhances banks ability to control their lending
risks.
Keywords: banks; information acquisition; market power; fixed costs; branch network; default costs; (follow links to similar papers)
JEL-Codes: D21; G21; L15; (follow links to similar papers)
49 pages, August 31, 2000
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