Intertemporal Rent-Seeking in the Banking Industry and Underwriting by Commercial Banks

Abstract

This paper develops an information-based banking model where the duration of lending relationships is determined endogenously. In the model, banks may use their informational advantage to extract intertemporal monopoly rents from the borrowers, which deteriorates the allocation of funds. The duration of lending relationship is affeeted by competition in an underwriting business and the extent of information disclosure about borrowers' quality. The paper shows that competitive pressure by the entry of banks to the underwriting business may deteriorate the allocation of funds, and that the firewall that limits informational interlinks between lending and underwriting is not necessarily welfare improving.