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Benefits of relationship banking: evidence from consumer credit markets

Author

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  • Sumit Agarwal
  • Souphala Chomsisengphet
  • Chunlin Liu
  • Nicholas S. Souleles

Abstract

This paper empirically examines the benefits of relationship banking to banks, in the context of consumer credit markets. Using a unique panel dataset that contains comprehensive information about the relationships between a large bank and its credit card customers, we estimate the effects of relationship banking on the customers' default, attrition, and utilization behavior. We find that relationship accounts exhibit lower probabilities of default and attrition, and have higher utilization rates, compared to non-relationship accounts, ceteris paribus. Such effects become more pronounced with increases in various measures of the strength of the relationships, such as relationship breadth, depth, length, and proximity. Moreover, dynamic information about changes in the behavior of a customer?s other accounts at the bank, such as changes in checking and savings balances, helps predict and thus monitor the behavior of the credit card account over time. These results imply significant potential benefits of relationship banking to banks in the retail credit market.

Suggested Citation

  • Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2010. "Benefits of relationship banking: evidence from consumer credit markets," Working Paper Series WP-2010-05, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-2010-05
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    References listed on IDEAS

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    1. Loretta J. Mester & Leonard I. Nakamura & Micheline Renault, 2007. "Transactions Accounts and Loan Monitoring," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 529-556.
    2. Musto, David K. & Souleles, Nicholas S., 2006. "A portfolio view of consumer credit," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 59-84, January.
    3. Agarwal, Sumit & Ambrose, Brent W. & Liu, Chunlin, 2006. "Credit Lines and Credit Utilization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 1-22, February.
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    Citations

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    Cited by:

    1. Jambulapati, Vikram & Stavins, Joanna, 2014. "Credit CARD Act of 2009: What did banks do?," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 21-30.
    2. Rocholl, Jörg & Puri, Manju & Steffen, Sascha, 2011. "On the importance of prior relationships in bank loans to retail customers," Working Paper Series 1395, European Central Bank.
    3. Khandani, Amir E. & Kim, Adlar J. & Lo, Andrew W., 2010. "Consumer credit-risk models via machine-learning algorithms," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2767-2787, November.
    4. Martin Brown & Matthias Hoffmann, 2016. "Relationship Banking in the Residential Mortgage Market? Evidence from Switzerland," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 152(1), pages 23-48, January.
    5. Beck, Thorsten & Brown, Martin, 2015. "Foreign bank ownership and household credit," Journal of Financial Intermediation, Elsevier, vol. 24(4), pages 466-486.
    6. Santikian, Lori, 2014. "The ties that bind: Bank relationships and small business lending," Journal of Financial Intermediation, Elsevier, vol. 23(2), pages 177-213.
    7. Jason Allen & H. Evren Damar & David Martinez-Miera, 2016. "Consumer Bankruptcy, Bank Mergers, and Information," Review of Finance, European Finance Association, vol. 20(4), pages 1289-1320.
    8. Sumit Agarwal & Paige Marta Skiba & Jeremy Tobacman, 2009. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?," American Economic Review, American Economic Association, vol. 99(2), pages 412-417, May.
    9. Chun Chang & Guanmin Liao & Xiaoyun Yu & Zheng Ni, 2014. "Information from Relationship Lending: Evidence from Loan Defaults in China," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(6), pages 1225-1257, September.
    10. O. Emre Ergungor & Stephanie Moulton, 2011. "Beyond the transaction: depository institutions and reduced mortgage default for low-income homebuyers," Working Papers (Old Series) 1115, Federal Reserve Bank of Cleveland.
    11. Neema Mori & Godfrey Ng’urah, 2020. "The Influence of Relationship Lending on SMEs Loan Repayment Performance," Emerging Economy Studies, International Management Institute, vol. 6(2), pages 166-178, November.
    12. Schlüter, Tobias & Sievers, Sönke & Hartmann-Wendels, Thomas, 2012. "How can banks effectively stabilize their retail customers saving behavior? The impact of contractual rewards on saving persistence and cash flow volatility," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62057, Verein für Socialpolitik / German Economic Association.

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    Keywords

    Consumer credit; Credit cards;

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