The impact of competition on bank orientation

How do banks react to increased competition? Recent banking theory significantly disagrees regarding the impact of competition on bank orientation-i.e., the choice of relationship-based versus transactional banking. We empirically investigate the impact of interbank competition on bank branch orientation. We employ a unique data set containing detailed information on bank-firm relationships. We find that bank branches facing stiff local competition engage considerably more in relationship-based lending. Our results illustrate that competition and relationships are not necessarily inimical.