Lending Competition, Relationship Banking, and Credit Availability for Entrepreneurs

RIETI Discussion Paper Series Working Paper No. 07-E-036

42 Pages Posted: 2 Mar 2007

See all articles by Yoshiaki Ogura

Yoshiaki Ogura

Waseda University, Faculty of Political Science and Economics

Date Written: June 2007

Abstract

Existing theories consistently predict that relationship banking enhances credit availability for new firms. To put more concretely, these theories predict that soft information acquisition about borrowers' creditworthiness and the resulting incumbent lender's profit-improving and relation-specific consulting ability yield a monopolistic rent for the incumbent lender, and that this expected rent encourages a bank to lend to younger firms to pre-empt an exclusive relationship ahead of rival banks. The present study tries to provide evidence for this hypothesis using a dataset collected from the 2003 Survey of the Financial Environment of Enterprises in Japan. Our statistical analysis shows that the time interval from start-up to the first loan approval for a firm is shorter if a bank intends to undertake relationship banking, even after controlling fund-demand and creditworthiness factors of each firm. This result provides evidence to support the above hypothesis. Our logit analysis shows that the probability for banks to undertake relationship banking is decreasing or hump-shaped against the number of competing banks. Thus, the increase in the number of competing banks is more likely to discourage these banks from providing relationship banking, and this in turn diminishes credit availability for new firms. Besides such an effect arising from relationship banking, the data shows evidence suggesting the statistical significance of another mechanism generating a negative correlation between the number of competing banks and credit availability for new firms, which may be explained by the theory of winner's curse. As a whole, credit availability for new firms was higher in more concentrated local credit markets in the last fifteen years in Japan.

Keywords: credit availability, lending competition, relationship banking, small business finance

JEL Classification: G21, L11, L14

Suggested Citation

Ogura, Yoshiaki, Lending Competition, Relationship Banking, and Credit Availability for Entrepreneurs (June 2007). RIETI Discussion Paper Series Working Paper No. 07-E-036, Available at SSRN: https://ssrn.com/abstract=966017 or http://dx.doi.org/10.2139/ssrn.966017

Yoshiaki Ogura (Contact Author)

Waseda University, Faculty of Political Science and Economics ( email )

1-6-1 Nishi-waseda, Shinjuku-ku
Tokyo
Japan

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