Shusen Qi, Ralph De Haas, Steven Ongena, Stefan Straetmans, Tamas Vadasz
Review of Finance, Volume 28, Issue 6, November 2024, Pages 1881–1918, https://doi.org/10.1093/rof/rfae021
This article investigates how the introduction of information sharing between banks influences the spatial clustering of bank branches. The authors develop a theoretical model of credit market competition subject to adverse selection, where borrowers initially establish relationships with local “insider” banks that receive informative signals about their creditworthiness. The introduction of information sharing allows “outsider” banks to access a subset of this information, reducing information asymmetries.
The model predicts that information sharing increases the likelihood that banks open new branches in localities with more pre-existing branches of competitor banks. This effect is expected to be stronger in urban areas where shared hard information is more prevalent, as opposed to rural areas that rely more on non-transferable soft information. The model also predicts that the impact will be stronger for smaller, relationship-oriented banks that benefit more from access to shared information.
To test these predictions, the authors use detailed data on bank branch locations across 19 Eastern European countries from 1995-2012, many of which introduced information sharing systems during this period. They employ an empirical framework in which they compare branch openings across localities with different numbers of pre-existing branches, before and after the introduction of information sharing.
The results are in line with the model’s predictions and show that information sharing leads to increased clustering of bank branches, especially in larger cities. This effect is more pronounced for smaller banks and in countries with higher-quality information sharing systems. The authors also find that information sharing allows firms to borrow from more distant banks, reducing spatial credit rationing.
The findings suggest that the introduction of information sharing can reshape the spatial distribution of banking services. While it enables greater access to credit for some borrowers, it may eventually also lead to increased spatial disparities, with banking services concentrating in larger cities. The article highlights the importance of considering the spatial dimensions of banking regulations and the potential trade-offs they entail for different types of borrowers and regions.