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When arm’s length is too far. Relationship banking over the credit cycle

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  • Beck, Thorsten
  • Degryse, Hans
  • De Haas, Ralph
  • van Horen, Neeltje

Abstract

Using a novel way to identify relationship and transaction banks, we study how banks’ lending techniques affect credit constraints of small and medium-sized enterprises across emerging Europe. We link the lending techniques that banks use in the direct vicinity of firms to these firms’ credit constraints at two contrasting points of the credit cycle. We show that relationship lending alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in a downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe. Additional evidence suggests that the reduction in credit constraints due to relationship lending helps to mitigate the adverse impact of an economic downturn on local firm growth and does not constitute evergreening of underperforming loans.

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  • Beck, Thorsten & Degryse, Hans & De Haas, Ralph & van Horen, Neeltje, 2015. "When arm’s length is too far. Relationship banking over the credit cycle," LSE Research Online Documents on Economics 62005, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:62005
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    Cited by:

    1. Luis Araujo & Qingqing Cao & Raoul Minetti & Pierluigi Murro, 2019. "Credit Crunches, Asset Prices and Technological Change"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 153-179, April.
    2. Giovanni Ferri & Raoul Minetti & Pierluigi Murro, 2018. "Credit Relationships in the Great Trade Collapse. Micro Evidence From Europe," CERBE Working Papers wpC26, CERBE Center for Relationship Banking and Economics.
    3. Gopalakrishnan, Balagopal & Jacob, Joshy & Pandey, Ajay, 2018. "Lender Moral Hazard in State-owned Banks: Evidence from an Emerging Economy," IIMA Working Papers WP 2018-07-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    4. repec:bla:finmgt:v:48:y:2019:i:1:p:117-157 is not listed on IDEAS
    5. Hans Degryse & Artashes Karapetyan & Sudipto Karmakar, 2018. "To Ask or Not To Ask? Collateral versus Screening in Lending Relationships," Working Papers REM 2018/49, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    6. Banerjee, Ryan & Gambacorta, Leonardo & Sette, Enrico, 2017. "The real effects of relationship lending," CEPR Discussion Papers 12340, C.E.P.R. Discussion Papers.
    7. Laeven, Luc & McAdam, Peter & Popov, Alexander, 2018. "Credit Shocks, Employment Protection, and Growth: Firm-level Evidence from Spain," CEPR Discussion Papers 13026, C.E.P.R. Discussion Papers.
    8. repec:bla:acctfi:v:58:y:2019:i:5:p:1503-1523 is not listed on IDEAS
    9. repec:eee:jbfina:v:101:y:2019:i:c:p:173-187 is not listed on IDEAS
    10. repec:eee:corfin:v:55:y:2019:i:c:p:49-68 is not listed on IDEAS
    11. Degryse, Hans & Karapetyan, Artashes & Karmakar, Sudipto, 2018. "To Ask or Not To Ask? Bank Capital Requirements and Loan Collateralization," CEPR Discussion Papers 13331, C.E.P.R. Discussion Papers.
    12. Luis Araujo & Qingqing Cao & Raoul Minetti & Pierluigi Murro, 2019. "Credit Crunches, Asset Prices and Technological Change"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 153-179, April.
    13. de Haas, Ralph & Lu, Liping & Ongena, S.R.G., 2018. "Clear and Close Competitors? : On the Causes and Consequences of Bilateral Competition between Banks," Discussion Paper 2018-027, Tilburg University, Center for Economic Research.
    14. Ambrocio, Gene & Hasan, Iftekhar, 2018. "Private information and lender discretion across time and institutions," Research Discussion Papers 17/2018, Bank of Finland.
    15. repec:eee:ememar:v:37:y:2018:i:c:p:47-65 is not listed on IDEAS
    16. Murro, Pierluigi & Peruzzi, Valentina, 2019. "Family firms and access to credit. Is family ownership beneficial?," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 173-187.
    17. SAKAI Koji & UESUGI Iichiro, 2019. "Credit Reallocation, Firm Size, and Productivity," Discussion papers 19004, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    Keywords

    relationship banking; credit constraints; credit cycle;

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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