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

Carletti, Elena ; Cerasi, Vittoria ; Daltung, Sonja

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URN: urn:nbn:de:bsz:180-madoc-27297
Document Type: Working paper
Year of publication: 2004
The title of a journal, publication series: None
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: G32 G21 D82 ,
Subject headings (SWD): Kreditgeschäft , Unternehmenskooperation , Kreditrisiko , Portfoliomanagement , Kreditwürdigkeit , Trittbrettfahrerverhalten
Keywords (English): individual-bank lending , multiple-bank lending , monitoring , diversification , free-riding problem
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.
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