Multiple-bank lending with a public signal

Abstract

We examine the interactions between multiple hierarchies of banks, loan officers, and borrowers when there is an exogenous informative signal to the principal. The possibility of collusion between the borrower and the loan officers in charge of monitoring shapes the incentives for the loan officers. When the probability with which the signal appears is low, collusion threats induce excessive monitoring in a collusion-free equilibrium, while, for high probability, monitoring is at its non-delegation level, a similar result to vertical integration. Under multi-bank lending, delegation agreements can solve the problem of free-riding in monitoring and lead to more intense monitoring relative to single-bank lending. This is because collusive threats make monitoring efforts strategic add-ons due to the "rent-locking" effect. In addition, we show that a bank may decide not to employ a monitor and take advantage of information collected by the other bank's loan officer, which in turn provides a new justification for syndicated loans based on threats of collusion.