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Distance, Lending Relationships, and Competition



    1. 1KU Leuven and CentER, Tilburg University
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    1. 2CentER, Tilburg University and CEPR
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    • Hans Degryse is from KU Leuven and CentER, Tilburg University. Steven Ongena is from CentER, Tilburg University and CEPR. The authors are especially indebted to an anonymous referee, Robert Hauswald, and Robert Marquez for many insightful comments. We also received valuable comments from Adam Ashcraft, Allen Berger, Clive Bell, Arnoud Boot, Jan Bouckaert, Santiago Carbó Valverde, Elena Carletti, Giovanni Dell'Ariccia, Jurgen Eichberger, Thomas Gehrig, Hans Gersbach, Rick Green (the editor), Larry Goldberg, Reint Gropp, Timothy Hannan, Philipp Hartmann, Roman Inderst, Tulio Jappelli, Abe de Jong, Robert Lensink, Ernst Maug, Phil Molyneux, Theo Nijman, Marco Pagano, Maria Fabiana Penas, Mitch Petersen, Nagpurnanand Prabhala, Joao Santos, Alessandro Sbuelz, Elmer Sterken, Linda Toolsema-Veldman, Greg Udell, Martijn Van Dijck, Frank Verboven, Philip Vermeulen, Jurgen Weigand, and Gunther Wuyts, and participants at the 2003 American (Washington, DC), 2003 European (Glasgow), and 2002 German (Köln) Finance Association Meetings, the 2003 European Central Bank—Center for Financial Studies Network Meeting on Capital Markets and Financial Integration (Helsinki), the 2002 Federal Reserve Bank of Chicago's Annual Conference on Bank Structure and Competition, the 2002 European Meeting of the Econometric Society (Venice), the 2002 SUERF Conference on Geography and Banking and Financial Markets (Helsinki), the 2002 Symposium on Finance, Banking, and Insurance (Karlsruhe), the Bundesbank—Center for Financial Studies—European Central Bank Joint Lunch Seminar, and Seminars at the Central Bank of Sweden, Copenhagen Business School, CSEF-Salerno, Federal Reserve Bank of New York, Free University of Amsterdam, Koblenz Business School, Norwegian School of Management BI, CentER-Tilburg University, Erasmus University Rotterdam, and the Universities of Amsterdam, Antwerp, Groningen, Heidelberg, and Maryland. The authors are grateful to Dirk Rober for providing extraordinary programming assistance, to Jeanne Bovenberg for her critical editorial assistance, and to Ivonne Eltink, Nancy Kanters, and Nicole Segers for their valuable research support. Degryse received financial support from the Fund for Scientific Research—Flanders (FWO) and the TMR-Network on the Industrial Organization of Banking and Financial Markets. Ongena benefited from the financial support of the Netherlands Organization for Scientific Research (NWO).


We study the effect on loan conditions of geographical distance between firms, the lending bank, and all other banks in the vicinity. For our study, we employ detailed contract information from more than 15,000 bank loans to small firms comprising the entire loan portfolio of a large Belgian bank. We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending. Loan rates decrease with the distance between the firm and the lending bank and increase with the distance between the firm and competing banks. Transportation costs cause the spatial price discrimination we observe.