Monitoring and market power in loan markets

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Title: Monitoring and market power in loan markets
Author: Hyytinen, Ari ; Toivanen, Otto
Organization: Suomen Pankki
Department / Unit: Rahoitusmarkkinaosasto
Financial Markets Department
Series: Suomen Pankin keskustelualoitteita
Bank of Finland. Discussion papers
Series number: 9/2000
Year of publication: 2000
Publication date: 30.8.2000
Pages: 50 s.
Keywords: luottokelpoisuus; luottotappiot; Suomi; pankkitoiminta; luotot; riskit; mallit; valvonta; informaatio;
Abstract: Whether or not banks are engaged in ex ante monitoring of customers may have important consequences for the whole economy.We approach this question via a model in which banks can invest in either information acquisition or market power (product differentiation). The two alternatives generate different predictions, which are tested using panel data on Finnish local banks.We find evidence that banks' investments in branch networks and human capital (personnel) contribute to information acquisition but not to market power.We also find that managing customers' money transactions enhances banks ability to control their lending risks.

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