Working Paper: CEPR ID: DP9662
Authors: Patrick Bolton; Xavier Freixas; Leonardo Gambacorta; Paolo Emilio Mistrulli
Abstract: We study how relationship lending and transaction lending vary over the business cycle. We develop a model in which relationship banks gather information on their borrowers, which allows them to provide loans for profitable firms during a crisis. Due to the services they provide, operating costs of relationship-banks are higher than those of transaction-banks. In our model, where relationship-banks compete with transaction-banks, a key result is that relationship-banks charge a higher intermediation spread in normal times, but offer continuation-lending at more favorable terms than transaction banks to profitable firms in a crisis. Using detailed credit register information for Italian banks before and after the Lehman Brothers' default, we are able to study how relationship and transaction-banks responded to the crisis and we test existing theories of relationship banking. Our empirical analysis confirms the basic prediction of the model that relationship banks charged a higher spread before the crisis, offered more favorable continuation-lending terms in response to the crisis, and suffered fewer defaults, thus confirming the informational advantage of relationship banking.
Keywords: crisis; relationship banking; transaction banking
JEL Codes: E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms relying on relationship banks (R banks) (G21) | less likely to default (G51) |
| R banks (G21) | lower interest rates during crises (E43) |
| T banks (G21) | higher interest rates during downturns (E44) |
| R banks (G21) | more favorable continuation lending terms during the crisis (G21) |
| better monitoring and information gathering by R banks (E58) | reduced default risk (G33) |