Relationship Lending, Bank Competition and Financial Stability
Year: 2014 Volume: 8 Issue: 3 Pages: 102-124
Abstract: This paper explores the effects of relationship lending on bank stability under perfect bank competition. Relationship banking generates profitable old lending relationships, which ease the stress to search and monitor new borrowers, and create great charter values for banks even under bank competition. These everlasting charter values mitigate risk-taking incentives improving financial stability. We find the maximum growth speed for banks so that they will avoid risk taking, and discover the optimal equity capital requirement: new banks and rapidly growing banks should have relatively more capital.
JEL classification: G21, G22, G28
Keywords: Relationship lending, bank competition, financial stability, charter value, bank capital requirements
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