Relationship Lending, Transaction Lending and Corporate Banking

Problems of informational asymmetries between bank and firm, and any corresponding form of credit rationing, can be managed through different ways, like different forms of signalling (e.g., collaterals, equity cofinancing, etc.) or by relationship lending; i.e., by creating an exclusive relationship with a bank. Relationship lending is the internal way by which the financial system tries to overlap the costs of the asymmetric information between the bank and the borrower (mainly represented by small–medium enterprises and households). To understand potential limitations on the investment choices of small firms due to financial constraints, in this chapter, we analyze how a repeated and continuous relationship between a bank and an enterprise (relationship lending) can alleviate financial constraints and limit the impact of credit rationing on the enterprise’s financial choices. The relationship lending model does not preclude using more standardized and impersonal customer relationships, such as transaction lending, which relies primarily on quantitative and objective information (so-called ‘hard information’). The evolution of corporate banking suggests that the two models do not exclude but rather complement each other in what is referred to in the literature as the corporate banking model. In a scenario where transaction lending mainly develops, relationship lending does not disappear but evolves into a more comprehensive and articulated model characterized by different combinations of hard and soft information.