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Relationship and Transaction Lending in a Crisis

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  • Patrick Bolton
  • Xavier Freixas
  • Leonardo Gambacorta

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.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 714.

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Date of creation: Sep 2013
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Handle: RePEc:bge:wpaper:714

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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. Lev Ratnovski, 2013. "Competition Policy for Modern Banks," IMF Working Papers 13/126, International Monetary Fund.
  2. Nakhoda, Aadil, 2013. "Bank competition and export diversification," MPRA Paper 50774, University Library of Munich, Germany.
  3. 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.
  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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