When arm's length is too far: Relationship banking over the credit cycle |
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| Authors: | Thorsten Beck Hans Degryse Ralph De Haas Neeltje van Horen |
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| Affiliation: | 1. Cass Business School, City University London, 106 Bunhill Row, EC1Y 8TZ London, UK;2. KU Leuven, Faculty of Economics and Business, Naamsestraat 69, 3000 Leuven, Belgium;3. European Bank for Reconstruction and Development, One Exchange Square, EC2A 2JN London, UK;4. De Nederlandsche Bank, Amsterdam, the Netherlands;5. Tilburg University, Department of Finance, Warandelaan 2, 5037 AB Tilburg, the Netherlands;6. Centre for Economic Policy Research, 33 Great Sutton Street, EC1V 0DX London, UK |
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| Abstract: | We conduct face-to-face interviews with bank chief executive officers to classify 397 banks across 21 countries as relationship or transaction lenders. We then use the geographic coordinates of these banks’ branches and of 14,100 businesses to analyze how the lending techniques of banks near firms are related to credit constraints at two contrasting points of the credit cycle. We find that while relationship lending is not associated with credit constraints during a credit boom, it alleviates such constraints during a downturn. This positive role of relationship lending is stronger for small and opaque firms and in regions with a more severe economic downturn. Moreover, relationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans. |
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| Keywords: | F36 G21 L26 O12 016 Relationship banking Credit constraints Credit cycle |
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