15/2007
September
The Murky Side of Local Banks: Relationship versus Informal Banking
 
Giovanni Ferri, Zeno Rotondi, Giacomo Vaciago


Like most industrialised countries, Italy experienced a wave of mergers throughout the banking industry over the last decade and it seems that many customers have been dissatisfied with the disappearance of their local banks. This view is supported by the observation that several new banks have been launched to fill the gap left by the small local banks that were purchased. What is the explanation for this Arabian phoenix phenomenon? We consider two explanations which both hinge on the demand from firms for informal relationships with their banks, something which local banks are better equipped to provide. Firstly, received wisdom in the literature would suggest that this demand originates from the needs of traditionally more opaque small businesses to have a special relationship with their banks to overcome problems of information asymmetry in gaining access to bank loans. We label this as the "need for relationship banking" motivation. Secondly, we consider an alternative explanation, the hypothesis that businesses operating in the black economy require specific banking services, which they find it easier to obtain from local banks, under the umbrella of informal relationships. We term this as the "need for informal banking" motivation. While we leave to future work testing for the "need for relationship banking" motivation, this paper presents evidence supportive of the importance of the need of informal banking.

 
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