Bank interest rates and credit relationships in Italy

When evaluating the performance of a financial system in supporting the investment activity of the corporate sector, a distinction is usually drawn between "banking economies" and "market economies", the former being characterized by long-term relations between banks and the industrial sector. Although theoretical studies and empirical results seem to agree that lending relationships increase the available quantity of capital to firms, they have little to say on the cost of bank credit: it is not clear whether a close relationship with a main bank would allow the borrower to pay a lower interest rate or expose him to a monopolistic rent. Using a unique data-set reporting detailed information on the evolution over time of individual bank-borrower relationships in Italy, we show evidence that a main bank provides credit at a lower cost and that some competition helps to reinforce the commitment between the borrower and the bank. (C) 1999 Elsevier Science B.V. All rights reserved.