When Arm's Length is too far. Relationship Banking over the Credit Cycle

OMI Seminar Series

Using a novel way to identify relationship and transaction banks, we study how banks’ lending techniques affect funding to small and medium-sized enterprises. For 21 countries we link the lending techniques that banks use in the direct vicinity of firms to these firms’ credit constraints at two contrasting points of the credit cycle. We show that relationship lending alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in a downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe. Additional evidence suggests that the reduction in credit constraints due to relationship lending helps to mitigate the adverse impact of an economic downturn on local firm growth and does not constitute evergreening of underperforming loans (JEL codes: F36, G21, L26, O12, 016).

Joint work with: Hans Degryse, Ralph De Haas, Neeltje van Horen












Tuesday, December 2, 2014 - 12:30
to 13:30