Endogenous Product Differentiation in Credit Markets: What do Borrowers Pay for?

Posted: 17 May 2005

See all articles by Moshe Kim

Moshe Kim

University of Haifa - Department of Economics

Eirik Gaard Kristiansen

NHH Norwegian School of Economics; Norwegian School of Economics (NHH) - Department of Economics

Bent Vale

Norges Bank (Central bank of Norway)

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Abstract

This paper studies strategies pursued by banks in order to differentiate their services and soften competition. More specifically we analyze whether bank's ability to avoid losses, its capital ratio, or bank size can be used as strategic variables to make banks different and increase the interest rates banks can charge their borrowers in equilibrium. Using a panel of data covering Norwegian banks between 1993 and 1998 we find empirical support that the ability to avoid losses, measured by the ratio of loss provisions, may act as such a strategic variable. A likely interpretation is that borrowers use high-quality low-loss banks to signal their creditworthiness to other stakeholders. This supports the hypothesis that high-quality banks serve as certifiers for their borrowers. Furthermore, this suggests that not only lenders and supervisors but also borrowers may discipline banks to avoid losses.

JEL Classification: G21, L15

Suggested Citation

Kim, Moshe and Kristiansen, Eirik Gaard and Vale, Bent, Endogenous Product Differentiation in Credit Markets: What do Borrowers Pay for?. Journal of Banking and Finance, Vol. 29, pp. 681-699, Available at SSRN: https://ssrn.com/abstract=722387

Moshe Kim

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel
(972) 4 8240115 (Phone)
(972)4-8240059 (Fax)

Eirik Gaard Kristiansen

NHH Norwegian School of Economics ( email )

Helleveien 30
Bergen, NO-5045
Norway
+47 55 95 92 78 (Phone)
+47 55 95 95 43 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

Bent Vale (Contact Author)

Norges Bank (Central bank of Norway) ( email )

Bankplassen 2
P.O. Box 1179
Oslo, N-0107
Norway
+47 22 31 66 74 (Phone)
+47 22 42 40 62 (Fax)

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