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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.

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  • 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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    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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