تمایز محصول درون زا در بازارهای اعتباری: وام گیرندگان چه چیزی را پرداخت میکنند؟

This paper studies strategies pursued by banks in order to differentiate their services and soften competition. More specifically we analyze whether bank's ability to avoid losses, its capital ratio, or bank size can be used as strategic variables to make banks different and increase the interest rates banks can charge their borrowers in equilibrium. Using a panel of data covering Norwegian banks between 1993 and 1998 we find empirical support that the ability to avoid losses, measured by the ratio of loss provisions, may act as such a strategic variable. A likely interpretation is that borrowers use high-quality low-loss banks to signal their creditworthiness to other stakeholders. This supports the hypothesis that high-quality banks serve as certifiers for their borrowers. Furthermore, this suggests that not only lenders and supervisors but also borrowers may discipline banks to avoid losses.

What do borrowers pay for? Are borrowers willing to pay higher rates to banks exhibiting higher reputation? If this is the case, some banks would invest in reputation for quality and differentiate their services from their rivals, thereby softening competition. In this paper we focus on such endogenous differentiation among banks. More precisely, which “quality” characteristics (equity ratios, loss avoidance, size etc.) do banks choose in order to differentiate themselves from competing banks. There are two major reasons for borrowers to be concerned with bank quality. First, banks provide certification which can be used to alleviate consequences of asymmetric information and to contribute to borrowers' value. By borrowing from a bank known to have a high-quality loan portfolio (i.e. low loan-loss provisions) a firm can signal its creditworthiness to its other stakeholders. In this manner a high quality bank certifies its borrowers. 1 Thus, banks can segment the markets according to borrowers' willingness to pay for borrowing from banks with high-quality loan portfolios and extract higher rents from those valuing certification.

In this paper we have studied strategies pursued by banks to differentiate their services from those of their rivals and thereby soften competition. More specifically we have analyzed if the bank size, a bank's ability to avoid losses, and its capital ratio can be used as such strategic variables. We also study to what extent borrowers are willing to pay for high quality along these dimensions. Using a panel of data covering Norwegian banks between 1993 and 1998 we did not find evidence for the use of high capital ratio as a strategic variable that borrowers are willing to pay for. This finding may be explained by the way the banking crisis in the early nineties was handled. We do, however, find empirical support for the banks' ability to avoid losses, as a strategic variable, indicating that the quality of a bank's loan portfolio is used to certify the credit worthiness of borrowers. This implies that borrowers in the market for credit line loans can discipline banks to avoid future losses. Hence, banks may face market discipline not only from the liability side (extensively discussed in the literature), but also from the asset side. This further strengthens the arguments for putting more emphasis on Pillar 3 of the Basel II which promotes transparency and market discipline.