Bank structure and the terms of lending to small businesses
By: Rodrigo Canales, Ramana Nanda
Contributors: Nanda, Ramana; Harvard Business School
Series: Working paper / Harvard Business School -- 08-101; Working paper (Harvard Business School) -- 08-101
Publisher: Harvard Business School
Published: 2008
Place of publication: Boston
Language: eng
Number of pages: 35
Description: Using loan-level data from Mexico, we study the relationship between the organizational structure of banks and the terms of lending to small businesses. We find that banks with decentralized lending structures - where branch managers have autonomy over the terms of lending - give larger loans to small firms and those with more "soft information" - particularly in states with weak legal enforcement of financial contracts. However, decentralized banks are also more responsive to the competitive environment when setting loan terms. They are more likely to restrict credit and to charge higher interests rates when they have market power, more so to smaller firms that have fewer outside options for external finance. These findings highlight a 'darker side' to decentralized banks and suggest that the relative benefit of a decentralized bank structure for small business lending depends critically on the nature of the competitive environment in which banks are located.
Notes: "June 2008"--Publisher's web site.

Includes bibliographical references.