Thesis on Banks and Proprietary Information


Student thesis: Doctoral Thesis

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Award date30 Jun 2017


Compared with other financial intermediation, banks play a special role in accumulating proprietary information through the screening and monitoring process. In China, the financial system is dominated by banking sector, and firms rely heavily on banks for external financing. In this thesis, I try to answer two important research questions: (1) what kind of role the local loan officers played in collecting proprietary information and managing the loans? (2) Do the existence proprietary information help banks to screen new clients more efficiently?

In the first essay, “Beyond Spatial Proximity: The Impact of Social Proximity on Information Production”, I examine if deeper embeddedness in local society makes local officers more efficient at information production. Specially, by using work in hometown as a natural proxy for a higher proximity to local society, I compare the default rate and interest rate difference between loans managed by local loan officers and nonlocal loan officers. The empirical evidence shows that both the default rate and interest rate of loans granted by local loan officers are significantly lower than those granted by nonlocal loan officers. Compare with loans granted by nonlocal loan officers, the default rate of loans granted by local loan officers is 1.15% lower. This difference is non-trivial and economically important given that the average loan default rate is only 1.99%. Under otherwise identical conditions, local loan officers charge 8 basis points lower interest rate than the nonlocal loan officers. These differences are more pronounced when firms suffer from high degree of information asymmetry. Moreover, the empirical evidence shows that local loan officers’ subjective credit assessments (SCA) are more predictive of ex post loan outcomes and more strongly associated with interest rate.

The second essay, “Relationship Banking and Banks’ Information Advantage -Evidence from New Clients’ Screening”, investigates the benefit of relationship banking for banks. The hypothesis is that with the help of proprietary information collected before, banks can assess a new client more efficiently. Based on a unique dataset collected by China Banking Regulatory Commission (CBRC) from 17 major banks, I am able to dig out the new bank client’s related firms who have borrowed from the bank before. The empirical results show that the default rate of loans granted to new clients with related firms is significantly lower. And only related firms with good credit quality can provide banks useful information. Moreover, this alternative channel for banks to collect information is more valuable if the new client has multiple related firms or the related firms have tighter relationship with the bank. The differences in default rate is more pronounced when the new client has more information asymmetries.

The findings in this thesis are among the first to address the importance of embeddedness in local society in information production. The results suggest that in addition to spatial proximity, local knowledge and regionally embedded social capital are important driving factors of information advantage. I also provide fresh empirical evidence on the benefits for banks to enroll in relationship banking.