Acquisition of Information in Loan Markets and Bank Market Power - an Empirical Investigation

Abstract

Do commercial banks invest less in information gathering activity when they compete more aggressively with each other? Does intensifying competitive pressure in bank loan markets affect the quality of informational ties that bind borrowers and lending banks? This paper contributes to this discussion by providing an empirical analysis of banks' information acquisition within a loan application situation. Using survey data from German manufacturing firms, we are able to measure information flows from loan applicants to banks. We find that firms located in more concentrated banking markets have to transfer more project-specific information to their lending banks. Furthermore we find that banks that systematically acquire more information about their loan customers are able to provide liquidity without inducing additional costly transfer of information. Third, we find credit to be more readily available in more concentrated banking markets. This confirms recent US findings. However, our analysis of banks' information acquisition offers an alternative explanation of why credit availability systematically varies with bank market structure.