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Deposits and Relationship Lending

  • Berlin, Mitchell
  • Mester, Loretta J

We empirically examine whether access to deposits with inelastic rates (core deposits) permits a bank to make contractual agreements with borrowers that are infeasible if the bank must pay market rates for funds. Such access insulates a bank's costs of funds from exogenous shocks, allowing it to insulate its borrowers against exogenous credit shocks. We find that, controlling for loan market competition, banks funded more heavily with core deposits provide more loan rate smoothing in response to exogenous changes in aggregate credit risk. Thus we provide evidence for a novel channel linking bank liabilities to relationship lending. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 12 (1999)
Issue (Month): 3 ()
Pages: 579-607

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Handle: RePEc:oup:rfinst:v:12:y:1999:i:3:p:579-607
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  28. Preece, Dianna & Mullineaux, Donald J., 1996. "Monitoring, loan renegotiability, and firm value: The role of lending syndicates," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 577-593, April.
  29. Billett, Matthew T & Flannery, Mark J & Garfinkel, Jon A, 1995. " The Effect of Lender Identity on a Borrowing Firm's Equity Return," Journal of Finance, American Finance Association, vol. 50(2), pages 699-718, June.
  30. James, Christopher, 1996. " Bank Debt Restructurings and the Composition of Exchange Offers in Financial Distress," Journal of Finance, American Finance Association, vol. 51(2), pages 711-27, June.
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  32. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
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  34. Sean Becketti & Charles S. Morris, 1992. "Are bank loans still special?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 71-84.
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