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A Quantitative Analysis of Bank Lending Relationships

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Abstract

We study the aggregate consequences of dynamic lending relationships in a model of heterogeneous banks facing financial frictions. We estimate the model's loan demand system on administrative loan-level data: the market power implied by the estimated strength and persistence of relationships yields a long run reduction in credit of 5.9%. Relationships amplify the negative real effects of credit supply shocks, but mute those of negative credit demand shocks. In a financial crisis which destroys 25% of bank net worth, for example, loan volume drops more than twice as much in our baseline model than in a competitive analog with no relationships, but banks recapitalize faster.

Suggested Citation

  • Kyle Dempsey & Miguel Faria-e-Castro, 2022. "A Quantitative Analysis of Bank Lending Relationships," Working Papers 2022-033, Federal Reserve Bank of St. Louis, revised 06 Mar 2025.
    • Handle: RePEc:fip:fedlwp:94821
    DOI: 10.20955/wp.2022.033
    Note: Publisher DOI: https://doi.org/10.1016/j.jfineco.2025.104083
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    References listed on IDEAS

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    1. Javier Bianchi & Saki Bigio, 2022. "Banks, Liquidity Management, and Monetary Policy," Econometrica, Econometric Society, vol. 90(1), pages 391-454, January.
    2. Mark Egan & Ali Hortaçsu & Gregor Matvos, 2017. "Deposit Competition and Financial Fragility: Evidence from the US Banking Sector," American Economic Review, American Economic Association, vol. 107(1), pages 169-216, January.
    3. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York, revised 01 Feb 2015.
    4. Rebecca Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, vol. 2(Oct), pages 1-14.
    5. Berlin, Mitchell & Mester, Loretta J., 1998. "On the profitability and cost of relationship lending," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 873-897, August.
    6. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
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    More about this item

    Keywords

    banking; lending relationships; aggregate dynamics;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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