Relationship Lending, Informational Rents And Competition

During a long time, relationship lending is a lending method to offset the information asymmetry between the banks and corporations. It's necessary to invest a cost to build a long relationship both to banks and corporations. Either of them can catch the private information for each other. Two broad trends characterize the recent evolution of commercial banking. While the industry has consolidated both within and across economies at a rapid pace, competition has also sharply increased. Indeed, one of the most cited driving forces behind the rapid consolidation in banking are the competitive pressures exerted by products and services that are close substitutes. Investment banks, mutual funds, insurance companies, and private investment vehicles have all started to compete for the core business of commercial banks: making loans and collecting deposits; These trends beg the question of how increased competition aspects the nature of financial intermediation and, in particular, the relationship between banks and borrowers. Although the emerging financial mergers have become more distant from their customers in their pursuit of economies of scale or scope, intermediaries also have an incentive to seek closer ties with borrowers to fend off the competition. In this paper we investigate how competition and informational asymmetries interact to shape financial intermediation and loan markets.While competition constrains the ability of banks to extract informational rents from lending relationships, their informational monopoly also curtails competition through the threat of adverse selection. To analyze an intermediary's optimal strategic response to these opposing effects we specify a model where the severity of asymmetric information between banks and borrowers increases with informational distance. Intermediaries acquire expertise in a specific sector and exert effort in building lending relationship beyond their core business. They then compete with each other in transaction and relationship loan markets where they differentiate theirloan offers in terms of informational location. As increased competition endogenously erodes informational rents intermediaries shift more resources to building relationships in their core markets. This retrenchment from peripheral loan segments permits banks to fend off the competitive threat to their captive market. Outside their core segment they offer transactional loans. In equilibrium, both forms of debt compete with each other but intermediaries specialize in a core market with relationship banking.This article concentrates on the relationship between banks and corporations. Then given a variable of information distance, it explores the relation of optimal strategy and expectation income. Based on the model in the second chapter, I analyze the cost and income of lending relationship and gave the conclusion. In the last chapter, I discuss some expanding problems. Those problems are important to further research in this field.