The Impact of Organizational Structure and Lending Technology on Banking Competition

Recent theoretical models argue that a bank's organizational structure reflects its lending technology.A hierarchically organized bank will employ mainly hard information, whereas a decentralized bank will rely more on soft information.We investigate theoretically and empirically how bank organization shapes banking competition.Our theoretical model illustrates how a bank's geographical reach and loan pricing strategy is determined not only by its own organizational structure but also by organizational choices made by its rivals. We take our model to the data by estimating the impact of the rival banks' organization on the geographical reach and loan pricing of a singular, large bank in Belgium.We employ detailed contract information from more than 15,000 bank loans granted to small firms, comprising the entire loan portfolio of this large bank, and information on the organizational structure of all rival banks located in the vicinity of the borrower.We find that the organizational structure of the close rival banks matters for both branch reach and loan pricing.The geographical footprint of the lending bank is smaller when the close rival banks are large, hierarchically organized, and technologically advanced. Such rival banks may rely more on hard information.Large rival banks in the vicinity also lower the degree of spatial pricing.We also find that the effects on spatial pricing are more pronounced for firms that generate less hard information, such as small firms.In short, size and hierarchy of rival banks in the vicinity influences both branch reach and loan pricing of the lender.