Multiple-Bank Lending: Diversification and Free-Riding in Monitoring

Arbeitspapier

This paper analyzes banks’ choice between lending to firms individually and sharing lending with other banks, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending is optimal whenever the benefit of greater diversification in terms of higher monitoring dominates the costs of free-riding and duplication of efforts. The model predicts a greater use of multiple-bank lending when banks are small relative to investment projects, firms are less profitable, and poor financial integration, regulation and inefficient judicial systems increase monitoring costs. These results are consistent with empirical observations concerning small business lending and loan syndication.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Sveriges Riksbank Working Paper Series ; No. 165

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: individual-bank lending ; multiple-bank lending ; monitoring ; diversification ; free-riding problem

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Carletti, Elena ; Cerasi, Vittoria ; Daltung, Sonja
• Event: Veröffentlichung
• (who): Sveriges Riksbank
• (where): Stockholm
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/82470
• Last update: 10.03.2025, 11:42 AM CET