Standing together through thick and thin: An experimental study of bank relationships and loan availability for SMEs

We conduct credit game experiments to examine the causal effect and mechanisms of bank relationships on loan availability for potentially distressed Small and Medium-sized Enterprises (SMEs).11We use the term SMEs to include medium-sized, small, and micro enterprises. In this paper, we focus particularly on small and micro businesses, as they are more financially constrained and operationally vulnerable. Results show that such relationships significantly improve loan availability for SMEs even under heightened borrower vulnerabilities, indicating lenders and borrowers stand together through thick and thin. By quantifying repayment willingness, we identify two behavioral channels: the implicit-constraint effect, in which relational incentives discourage borrower opportunism and raise repayment willingness, and the long-term perspective effect, which extends lenders’ decision horizons and increases their tolerance for short-term losses in pursuit of long-term cooperation. Further analyses indicate that bank relationships also reduce strategic misreporting in voluntary disclosure, and that lender patience strengthens the supportive role of relationships during distress. To enhance external validity, we supplement the lab experiment with a scenario-based survey and in-depth interviews of professional bank officers, which consistently confirm the experimental patterns. Our findings provide novel behavioral evidence on the value of bank relationships in easing financing constraints for potentially distressed SMEs and offer insights for fostering trust-based bank relationships under operational distress.