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A quantitative analysis of bank lending relationships

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  • Dempsey, Kyle
  • Faria-e-Castro, Miguel

Abstract

We study the aggregate consequences of dynamic lending relationships in a model of heterogeneous banks facing financial frictions. We estimate the model’s loan demand system on administrative loan-level data: the market power implied by the estimated strength and persistence of relationships yields a long run reduction in credit of 5.9%. Relationships amplify the negative real effects of credit supply shocks, but mute those of negative credit demand shocks. In a financial crisis which destroys 25% of bank net worth, for example, loan volume drops more than twice as much in our baseline model than in a competitive analog with no relationships, but banks recapitalize faster.

Suggested Citation

  • Dempsey, Kyle & Faria-e-Castro, Miguel, 2025. "A quantitative analysis of bank lending relationships," Journal of Financial Economics, Elsevier, vol. 170(C).
    • Handle: RePEc:eee:jfinec:v:170:y:2025:i:c:s0304405x25000911
    DOI: 10.1016/j.jfineco.2025.104083
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    More about this item

    Keywords

    Banking; Lending relationships; Aggregate dynamics;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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