Close competitors? On the causes and consequences of bilateral competition between banks

By Ralph De Haas, Liping Lu and Steven Ongena

What drives competition between banks, and what effect does inter-bank competition have on small firms’ credit constraints? Using data from interviews with CEOs of European banks, we find that a bank is more likely to identify another bank as a core competitor when their branch networks overlap more and when the potential competitor bank has more efficient lending procedures, is foreign-owned and/or applies the same lending techniques. We then show that more intense bilateral competition between banks at the local level leads to tighter credit constraints for small businesses, as strong local competition may impede the formation of lending relationships.