Working Paper: CEPR ID: DP12340
Authors: Ryan Banerjee; Leonardo Gambacorta; Enrico Sette
Abstract: This paper studies the real consequences of relationship lending on firm activity in Italy following Lehman Brothers’ default shock and Europe’s sovereign debt crisis. We use a large data set that merges the comprehensive Italian Credit and Firm Registers. We find that following Lehman’s default, banks offered more favourable continuation lending terms to firms with which they had stronger relationships. Such favourable conditions enabled firms to maintain higher levels of investment and employment. The insulation effects of tighter bank-firm relationships was still present during the European sovereign debt crisis, especially for firms tied to well capitalised banks.
Keywords: relationship banking; real effects of credit; credit supply
JEL Codes: E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| relationship lending (G21) | credit supply (E51) |
| relationship lending (G21) | real economic activity (E39) |
| longer banking relationships (G21) | favorable lending terms (G21) |
| favorable lending terms (G21) | higher levels of investment (E22) |
| favorable lending terms (G21) | higher levels of employment (J68) |
| stronger bank ties (F65) | greater credit growth (E51) |
| stronger bank ties (F65) | lower interest rates on credit lines (G21) |
| stronger bank ties (F65) | lower interest rates on term loans (E43) |
| robust relationships (L14) | sustain investment levels (G31) |
| robust relationships (L14) | sustain employment levels (J68) |
| higher pre-crisis interest rates (E43) | more insulation during crisis (H12) |
| valuable relationships (L14) | directed credit (E51) |
| directed credit (E51) | real effects on investment (G31) |
| directed credit (E51) | real effects on employment (J68) |