Working Paper: NBER ID: w19467
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: relationship lending; transaction lending; financial crisis; banking; informational advantage
JEL Codes: G01; G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Type of bank (relationship vs. transaction) (G21) | Terms of lending (G21) |
| Relationship banks (G21) | Continuation lending terms during crisis (G21) |
| Relationship banks (G21) | Default rates during crisis (E43) |
| Type of bank (relationship vs. transaction) (G21) | Default rates during crisis (E43) |
| Firms relying on relationship banks (G21) | Ability to weather a crisis (H12) |