Interlocking Directorates and Competition in Banking

Abstract

ABSTRACT We study the effects on corporate loan rates of an unexpected change in the Italian legislation that forbade interlocking directorates between banks. Exploiting multiple firm‐bank relationships to fully account for all unobserved heterogeneity, we find that prohibiting interlocks decreased the interest rates of previously interlocked banks by 14 basis points relative to other banks. The effect is stronger for high‐quality firms and for loans extended by interlocked banks with a large joint market share. Interest rates on loans from previously interlocked banks become more dispersed. Finally, firms borrowing more from previously interlocked banks expand investment, employment, and sales.

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