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Banking Relationship and Credit Risk: Another Type of Approach

Author

Listed:
  • Alia Gabriela DUTA

    (University of Craiova)

  • Victor Mihăiță DUTA

    (Court of Auditors of Romania)

Abstract

A discussion on the banking relationship invites us to observe that any commercial bank plays the role of financial intermediation between depositors and borrowers. In interpreting this role, the bank must be concerned with obtaining information on the quality of depositors and borrowers. Obtaining information about depositors and borrowers is necessary to alleviate the imperfection of the credit market and the information asymmetry. In our approach we will refer to the impact of the banking relationship on the risk of non-repayment of loans. We will start from the findings of Ferri and Messeori, 2000, respectively Jimenez and Saurina, 2004, who developed two hypotheses regarding the impact of the banking relationship on the risk of default on loans. The first hypothesis confirms the reduction of the credit risk due to the diminution of the information asymmetry. Obtaining this effect depends on the bank's orientation to develop over time a banking relationship that will allow a better knowledge of the borrowers. The second hypothesis is supported by the bank's tolerant behavior towards its former clients who, in certain periods, were in difficulty in repaying the loans on time.

Suggested Citation

  • Alia Gabriela DUTA & Victor Mihăiță DUTA, 2019. "Banking Relationship and Credit Risk: Another Type of Approach," Finante - provocarile viitorului (Finance - Challenges of the Future), University of Craiova, Faculty of Economics and Business Administration, vol. 1(21), pages 79-106, November.
    • Handle: RePEc:aio:fpvfcf:v:1:y:2019:i:21:p:79-106
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    More about this item

    Keywords

    high quality loans (honorable); medium quality loans (respectable); low quality loans (dangerous).;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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