1. Comments on the paper: Switching Costs in Local Credit Markets by Barone, Felici and Pagnini
Fabrizio Mattesini
Università di Roma “Tor Vergata”
Conference on the “Changing Geography of Banking”
Ancona September 22/23, 2006

2. The paper is an interesting analysis of competition in local credit markets and on the nature of bank firm relationships
If switching from one bank to another is costly for the firm, banks will exploit their monopoly power and
i) charge higher interest rates to old customers
ii) firms will tend to stick to the old bank, i.e. lender-borrower matches will tend to be state dependent.

3. There is however a different possible explanation behind the decision to switch bank
In a situation of asymmetric information the decision to switch bank could signal that the switcher is a low quality borrower to which the host bank denied credit.
In this case the authors argue we should observe higher interest rates charged to new customers and few borrowers switching

4. Very interesting paper
Impressive data set which allows the researcher to analyze the details of firm-bank relationships
Empirical analysis rigorous and well done

5. Only few comments:
The authors present a very clearcut situation between switching costs and adverse selection effects.
But are we so sure that adverse selection would lead banks to charge higher interest rates to new customers?
Sharpe (1990), for example, obtains a totally different result in a model of repeated corporate borrowing under adverse selection in which lenders obtain insider information on borrowers quality
In this model Sharpe argues that since borrowers and lenders rationally anticipate the possibility of being informationally captured, initial finance is offered at a discount which reflects the future markup on future terms of finance.

6. Indeed, Von Thadden (2004) argues that Sharpe’s solution of the model is wrong and that the model admits only a mixed strategy equilibrium where very few firms switch and those that switch are charged a higher interest rate.
My point, however, is that adverse selection models are known to produce very different results. I am not sure whether finding a positive or a negative interest rate differential between new and old firms allows us to discriminate clearly between the two hypotheses

7. My suggestion is that the authors, in order to better disentangle the issue, try to complement the analysis with some other information on the firms’ characteristics
In other words, what types of firms are the ones that switch? Are they sistematically less profitable, more indebted and therefore more risky than the one that remain locked in?

8. The empirical analysis:
Only few remarks
In the estimated equation, the interest rate does not depend on any measure of the firm’s riskiness.
I am worried that, without accounting for it, an interest rate equation might be misspecified.
If you worked in a panel dimension you could use firm specific effects.

9. Some sort of misspecification might indeed be behind a somewhat puzzling result: you find evidence of significant switching costs, but, on the other side, you find that firms with single banking relationships pay much lower interest than those with multiple bank relationships
Since this is probably due to the quality of borrowers, you should try to consider this in the analysis.

10. As for the analysis of state dependence, I find the methodology correct and useful.
The paper gives us some very interesting estimates of the size of switching costs
It would be interesting to have a larger number of estimates of swtching costs, that could be associated to the characteristics of local credit markets (industrial districts, underdeveloped areas……)

11. One last general remark:
The paper gives us a picture of the Italian credit market that is, for me, quite surprising
The paper shows a very large number of firms lending only from one bank. In Rome, for example, only 4770 firms out of had more than one banking relationship
Moreover, 87 per cent of credit extended to each firm came from a main bank
For firms having only one bank relationship, the switching rate ranges between 3 and 4 per cent, while for firms with two or more relationships the switching rate ranges between 23 and 28 %

12. This gives the impression of a “main bank system” rather than the traditionali Italian system based on “multiaffidamento”
Further analysis on the issue would be extremely important:
What type of firms are locked in? What is the relation with the local productive structure or the level of development? Does the nature of the banking system (local banks versus national banks) affect the number and the strength of relations?