Relationship Banking in Bilateral Oligopoly and Asymmetric Information

Abstract

This paper investigates the economic principles underlying the relationship between the real sector (non-financial) and the banking sector structures. Most literature has so far focused on the structure of conglomerates (Keiretsu/Chaebol) in East Asia in explaining the fast economic growth and/or recent crisis in the region. Traditionally, the strong vertical relationship between core companies and their subsidiaries in the real sector was believed to be a driving force for the economic success in the region. However, the degree of vertical relationship varies depending upon macroeconomic fluctuations and subsequently affects their relationship banks. The paper analyses the information sharing in a bilateral oligopoly framework. When banks prefer strong collaterals and/or credible third party repayment guarantees, a weaker vertical relationship in the real sector should lead to a consolidation in the banking sector via mergers or exits. Empirical evidence from the panel data constructed for the top 10 Chaebols and their subsidiaries between 1998-2001 supports the argument.