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Loss of a lending relationship: shock or relief?

Author

Listed:
  • Karolis Liaudinskas

    (Universitat Pompeu Fabra)

  • Kristina Grigaite

    (Bank of Lithuania)

Abstract

We use loan-level data and a novel identification setting – closures of banks – to study how forced break-ups of lending relationships affect firms’ borrowing costs. We find that after a financially distressed bank closed and its best borrowers were exogenously forced to switch, their borrowing costs dropped steeply and converged to the market’s average. We document no such effect when a healthy bank closed. This suggests that distressed banks can use informational monopoly power to hold up and exploit their best borrowers. Apparently, closures of such banks can release the best-quality firms from the hold-up and allow borrowing cheaper elsewhere.

Suggested Citation

  • Karolis Liaudinskas & Kristina Grigaite, 2019. "Loss of a lending relationship: shock or relief?," Bank of Lithuania Working Paper Series 64, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:64
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    More about this item

    Keywords

    relationship lending; hold-up; asymmetric information; bank closures; financial distress; switching costs;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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