We test a new hypothesis that may help explain the procyclicality of bank lending. The institutional memory hypothesis is driven by deterioration in the ability of loan officers over the bank's lending cycle that results in an easing of credit standards. We test this hypothesis using data from individual US banks over 1980–2000: over 200,000 bank-level observations on commercial loan growth, over 2,000,000 loan-level observations on interest rate premiums, and over 2000 bank-level observations on credit standards and loan spreads from bank management survey responses. The empirical analysis supports the hypothesis, although there are differences by bank size class.

The traditional structure-conduct-performance (SCP) hypothesis relates concentration and the mean level of prices but ignores the dispersion of prices around their mean levels. This paper tests two hypotheses which are capable of explaining both the mean and the dispersion of elements in the pricing vector of retail banks—a concentration/collusion-based hypothesis and an asymmetric information-based hypothesis. Evidence is found that the dispersion of bank fees across banks may be due to both market structure and information reasons. The level of bank fees appears to be generally insignificantly related to concentration.

We study the effects of the interplay between deregulation and governance on risk-taking in the financial industry. We consider the removal of regulatory geographic constraints for savings banks in Spain, the cajas, which led to a nationwide expansion of these banks during the past two decades. Based on a unique dataset that combines information on the geographic distribution of bank lending, matched lender-borrower financial statements, and borrower defaults, we find that the governance of the savings banks significantly affects the way in which they expand their lending activities. Savings banks that are subject to political influence by regional governments exhibit higher ex ante risk-taking and higher ex post loan defaults. Our study highlights the broader implications of the impact of global deregulation and consolidation and their interaction with governance issues.

We propose a more complete conceptual framework for analysis of SME credit availability issues. In this framework, lending technologies are the key conduit through which government policies and national financial structures affect credit availability. We emphasize a causal chain from policy to financial structures, which affect the feasibility and profitability of different lending technologies. These technologies, in turn, have important effects on SME credit availability. Financial structures include the presence of different financial institution types and the conditions under which they operate. Lending technologies include several transactions technologies plus relationship lending. We argue that the framework implicit in most of the literature is oversimplified, neglects key elements of the chain, and often yields misleading conclusions. A common oversimplification is the treatment of transactions technologies as a homogeneous group, unsuitable for serving informationally opaque SMEs, and a frequent misleading conclusion is that large institutions are disadvantaged in lending to opaque SMEs.

This paper investigates the value added by private information exchanges that share information on business payment performance. We discuss how this information is collected and disseminated by the world’s largest private information broker, Dun & Bradstreet. We provide the first empirical examination of the importance of this information at the lending decision level. Our findings indicate that exchange-generated information provides significant explanatory power in failure prediction models controlling for other credit information that is easily available to lenders. Our study complements the work of Jappelli and Pagano [Information sharing, lending and defaults; Cross country evidence, Centre for Economic Policy Research, Discussion Paper 2184, 1999] who find in cross-country macro level tests that information exchanges add value.

This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small business finance, and how capital structure varies with firm size and age. The interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment. We also analyze a number of research and policy issues, review the literature, and suggest topics for future research.

Some studies find that market power is associated with credit availability (information hypothesis); others find that less competitive banking markets lead to more credit rationing (market power hypothesis). Empirical research has relied solely on concentration as a measure of market power. The industrial organization literature, however, argues that a structural competition indicator such as the Lerner index is a superior measure. We test the information hypothesis and the market power hypothesis using these two alternative measures of market power and find that they generally give conflicting results. However, we also offer evidence suggesting that both views can be reconciled.

This paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988. While commercial loan rates are "sticky," consistent with rationing, this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory. In addition, the proportion of new loans issued under commitment does not increase significantly when credit markets are tight, despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing. Overall, the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon.

This paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988. While commercial loan rates are "sticky," consistent with rationing, this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory. In addition, the proportion of new loans issued under commitment does not increase significantly when credit markets are tight, despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing. Overall, the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon.