The Journal of Finance · 2000 · 1.6K citations · 32 references
BusinessBusiness EconomicsEconomicsBankingCompetition PolicyFinancial MarketsBank Relationship ManagementCapital MarketsRelationship BankingBank Lending FlowsBanking Relationship ManagementBorrower RelationshipsFirm Lending RelationshipsLender CompetitionLender Relationships
Banks face rising competition from other banks and capital markets, prompting debate over whether they will shift toward passive transaction lending or return to relationship‑based lending. The study investigates how banks’ lending behavior changes under these competitive pressures. We find that interbank competition increases the volume of relationship loans but lowers their added value, whereas capital‑market competition reduces relationship lending yet raises the value of each loan, resulting in welfare gains for some borrowers but not all.
How will banks evolve as competition increases from other banks and from the capital market? Will banks become more like capital market underwriters and offer passive transaction loans or return to their roots as relationship lending experts? These are the questions we address. Our key result is that as interbank competition increases, banks make more relationship loans, but each has lower added value for borrowers. Capital market competition reduces relationship lending (and bank lending shrinks), but each relationship loan has greater added value for borrowers. In both cases, welfare increases for some borrowers but not necessarily for all.
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Bank Runs, Deposit Insurance, and Liquidity
Douglas W. Diamond, Philip H. Dybvig · Journal of Political Economy · 1983 · 9.4K citations · Full text
Financial Intermediation and Delegated Monitoring
Douglas W. Diamond · The Review of Economic Studies · 1984 · 8.5K citations