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Relationship and transaction lending in a crisis

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  • Patrick Bolton
  • Xavier Freixas

    ()

  • Leonardo Gambacorta
  • Paolo Emilio Mistrulli

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 Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1385.

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Date of creation: Sep 2013
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Handle: RePEc:upf:upfgen:1385

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Web page: http://www.econ.upf.edu/

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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. Aadil Nakhoda, 2013. "Bank Competition and Export Diversification," EERI Research Paper Series EERI RP 2013/12, Economics and Econometrics Research Institute (EERI), Brussels.
  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.

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