A main bank approach to financial contracting

Abstract

This paper analyzes the costs and benefits of using a Main Bank (MB) as a financial provider. Several banks lend resources to a particular firm but only one monitors and remains responsible to other participants. These inside banks act as fund providers for the project, exchanging roles by the time other projects are considered. We show how, depending on firms quality and the banks skills to monitor, an MB-contract outperforms other arrangements. This type of financial relationship is particularly prominent in the Japanese marketplace, and in spite of recent setbacks, we believe sorne of its features have the potential to be implemented in other marketplaces.