N°25-10: Information Frictions inside a Bank: Evidence from Borrower Switching between Branches

Banks are multidivisional organizations in which branches hold local knowledge about borrowers. Can this "soft" information be transmitted across units? Studying the population of corporate loans originated by a large commercial bank in China from 2010 to 2020, we find that when firms switch branches within bank, the switching loans carry a significantly lower spread than comparable nonswitching loans. After switching, the new branch further reduces the loan spreads initially, but ratchets it up afterwards, surprising evidence of intra-bank hold-up! By documenting how internal communication failures distort lending, we link relationship banking with delegation, coordination, and information transmission within organizations.