Competition, specialization and bank--firm interaction: what happens in credit crunch periods?

This article empirically investigates the relationship between interbank competition, bank orientation and credit availability for a sample of more than 30 000 loans granted by a large banking group operating in the Italian credit market. We test whether and how, during a credit crunch period, competition affects bank orientation and how relationship lending and interbank competition can mitigate the credit crunch problem, for financially distressed firms. Using a unique and large bank--firm level data set, the main results show that an increase in competition is associated with a stronger relationship in terms of the length of the bank--borrower interaction, whereas the distance bank branch-headquarter negatively affects it. Moreover, a strong lender--borrower relationship, in terms of length and exclusivity, is found positively significant in determining the change in the amount of credit granted. Nonlinearity and sector specialization effects are tested, too, and report interesting results, supporting the crucial role of relationship lending during a financial crisis.