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When arm's length is too far: Relationship banking over the credit cycle

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  • Beck, Thorsten
  • Degryse, Hans
  • De Haas, Ralph
  • van Horen, Neeltje

Abstract

We conduct face-to-face interviews with bank chief executive officers to classify 397 banks across 21 countries as relationship or transaction lenders. We then use the geographic coordinates of these banks’ branches and of 14,100 businesses to analyze how the lending techniques of banks near firms are related to credit constraints at two contrasting points of the credit cycle. We find that while relationship lending is not associated with credit constraints during a credit boom, it alleviates such constraints during a downturn. This positive role of relationship lending is stronger for small and opaque firms and in regions with a more severe economic downturn. Moreover, relationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans.

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  • Beck, Thorsten & Degryse, Hans & De Haas, Ralph & van Horen, Neeltje, 2018. "When arm's length is too far: Relationship banking over the credit cycle," Journal of Financial Economics, Elsevier, vol. 127(1), pages 174-196.
  • Handle: RePEc:eee:jfinec:v:127:y:2018:i:1:p:174-196
    DOI: 10.1016/j.jfineco.2017.11.007
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    Cited by:

    1. Luis Araujo & Qingqing Cao & Raoul Minetti & Pierluigi Murro, 2019. "Credit Crunches, Asset Prices and Technological Change"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 153-179, April.
    2. Giovanni Ferri & Raoul Minetti & Pierluigi Murro, 2018. "Credit Relationships in the Great Trade Collapse. Micro Evidence From Europe," CERBE Working Papers wpC26, CERBE Center for Relationship Banking and Economics.
    3. Hans Degryse & Artashes Karapetyan & Sudipto Karmakar, 2018. "To Ask or Not To Ask? Collateral versus Screening in Lending Relationships," Working Papers REM 2018/49, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    4. Banerjee, Ryan & Gambacorta, Leonardo & Sette, Enrico, 2017. "The real effects of relationship lending," CEPR Discussion Papers 12340, C.E.P.R. Discussion Papers.
    5. Laeven, Luc & McAdam, Peter & Popov, Alexander, 2018. "Credit Shocks, Employment Protection, and Growth: Firm-level Evidence from Spain," CEPR Discussion Papers 13026, C.E.P.R. Discussion Papers.
    6. de Haas, Ralph & Lu, Liping & Ongena, S.R.G., 2018. "Clear and Close Competitors? : On the Causes and Consequences of Bilateral Competition between Banks," Discussion Paper 2018-027, Tilburg University, Center for Economic Research.
    7. Ambrocio, Gene & Hasan, Iftekhar, 2018. "Private information and lender discretion across time and institutions," Research Discussion Papers 17/2018, Bank of Finland.
    8. repec:eee:ememar:v:37:y:2018:i:c:p:47-65 is not listed on IDEAS
    9. SAKAI Koji & UESUGI Iichiro, 2019. "Credit Reallocation, Firm Size, and Productivity," Discussion papers 19004, Research Institute of Economy, Trade and Industry (RIETI).
    10. Gopalakrishnan, Balagopal & Jacob, Joshy & Pandey, Ajay, 2018. "Lender Moral Hazard in State-owned Banks: Evidence from an Emerging Economy," IIMA Working Papers WP 2018-07-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    11. repec:bla:finmgt:v:48:y:2019:i:1:p:117-157 is not listed on IDEAS
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    15. Degryse, Hans & Karapetyan, Artashes & Karmakar, Sudipto, 2018. "To Ask or Not To Ask? Bank Capital Requirements and Loan Collateralization," CEPR Discussion Papers 13331, C.E.P.R. Discussion Papers.
    16. Luis Araujo & Qingqing Cao & Raoul Minetti & Pierluigi Murro, 2019. "Credit Crunches, Asset Prices and Technological Change"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 153-179, April.
    17. Murro, Pierluigi & Peruzzi, Valentina, 2019. "Family firms and access to credit. Is family ownership beneficial?," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 173-187.

    More about this item

    Keywords

    Relationship banking; Credit constraints; Credit cycle;

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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