Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 165: Multiple-Bank Lending: Diversification and Free-Riding in Monitoring
Elena Carletti (), Vittoria Cerasi () and Sonja Daltung ()
Additional contact information
Elena Carletti: University of Mannheim and Center for Financial Studies, Postal: Taunusanlage 6, D-60329 Frankfurt, Germany
Vittoria Cerasi: Universita degli Studi di Milano Bicocca, Postal: Statistics Department, Via Bicocca degli Arcimboldi 8, 20126 Milano, Italy
Sonja Daltung: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Abstract: This paper analyzes banks’ choice between lending to firms individually and sharing lending with other banks, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending is optimal whenever the benefit of greater diversification in terms of higher monitoring dominates the costs of free-riding and duplication of efforts. The model predicts a greater use of multiple-bank lending when banks are small relative to investment projects, firms are less profitable, and poor financial integration, regulation and inefficient judicial systems increase monitoring costs. These results are consistent with empirical observations concerning small business lending and loan syndication.
Keywords: individual-bank lending; multiple-bank lending; monitoring; diversification; free-riding problem
40 pages, June 1, 2004
Full text files
WP_165.pdf
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