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Relationship and transaction lending in a crisis

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Author Info

  • Patrick Bolton

    ()
    (Columbia University, NBER and CEPR.)

  • Xavier Freixas

    ()
    (Universitat Pompeu Fabra, Barcelona Graduate School of Economics and CEPR)

  • Leonardo Gambacorta

    ()
    (Bank for International Settlements)

  • Paolo Emilio Mistrulli

    ()
    (Bank of Italy)

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, offering continuation-lending at more favourable 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 both types of bank 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 favourable continuation-lending terms in response to the crisis, and suffered fewer defaults, thus confirming the informational advantage of relationship banking.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 917.

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Date of creation: Jul 2013
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Handle: RePEc:bdi:wptemi:td_917_13

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Web page: http://www.bancaditalia.it
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Keywords: relationship banking; transaction banking; crisis;

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References

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Citations

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Cited by:
  1. Nakhoda, Aadil, 2013. "Bank competition and export diversification," MPRA Paper 50774, University Library of Munich, Germany.
  2. Zeno Rotondi, 2013. "Relationship banking and organizational models: a new structure for UniCredit Group in Italy," BANCARIA, Bancaria Editrice, vol. 4, pages 15-23, April.
  3. Lev Ratnovski, 2013. "Competition Policy for Modern Banks," IMF Working Papers 13/126, International Monetary Fund.
  4. Leandro D’Aurizio & Tommaso Oliviero & Livio Romano, 2014. "Family Firms, Soft Information and Bank Lending in a Financial Crisis," CSEF Working Papers 357, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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