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Relationship and transaction lending in a crisis

  • Patrick Bolton

    ()

    (Columbia University, NBER and CEPR.)

  • Xavier Freixas

    ()

    (Universitat Pompeu Fabra, Barcelona Graduate School of Economics and CEPR)

  • Leonardo Gambacorta

    ()

    (Bank for International Settlements)

  • Paolo Emilio Mistrulli

    ()

    (Bank of Italy)

We study how relationship lending and transaction lending vary over the business cycle. We develop a model in which relationship banks gather information on their borrowers, which allows them to provide loans for profitable firms during a crisis. Due to the services they provide, operating costs of relationship banks are higher than those of transaction banks. In our model, where relationship banks compete with transaction banks, a key result is that relationship banks charge a higher intermediation spread in normal times, offering continuation-lending at more favourable terms than transaction banks to profitable firms in a crisis. Using detailed credit register information for Italian banks before and after the Lehman Brothers� default, we are able to study how both types of bank responded to the crisis and we test existing theories of relationship banking. Our empirical analysis confirms the basic prediction of the model that relationship banks charged a higher spread before the crisis, offered more favourable continuation-lending terms in response to the crisis, and suffered fewer defaults, thus confirming the informational advantage of relationship banking.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 917.

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Date of creation: Jul 2013
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Handle: RePEc:bdi:wptemi:td_917_13
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