Multiple Banking as a Commitment Not To Rescue

The existence of multiple banking in the German "Hausbank" system is explained by a commitment problem on the side of the banks. Banks are faced with projects that may need an ex ante unprofitable but ex post profitable refinancing. A single bank cannot commit not to extend its loan, but two or more banks can commit to behave inefficiently ex post. They thereby create better incentives for the ex ante behaviour of the firms which are to be financed. Comparative statistics results and implications for insolvency rules and workouts are derived. 

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