Close Competitors? On the Causes and Consequences of Bilateral Competition Between Banks

Abstract

We interview 379 European bank CEOs to identify their banks’ main competitors. We then provide evidence on the drivers of bilateral bank competition; construct a novel competition measure at the locality level; and assess how well it explains variation in firms’ credit constraints. We find that banks identify another bank as a main competitor in small-business lending when their branch networks overlap; when both are foreign owned or relationship oriented; and when the potential competitor has fewer hierarchical layers. Intense bilateral bank competition increases local credit constraints, especially for small firms, as competition may impede the formation of lending relationships.