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The Dynamics in Requested and Granted Loan Terms when Bank and Borrower Interact Repeatedly

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  • Kirschenmann, K.

    (Tilburg University, Center For Economic Research)

Abstract

This paper studies how credit constraints develop over bank relationships. I analyze a unique dataset of matched loan application and loan contract information and measure credit constraints as the ratio of requested to granted loan amounts. I find that the most important determinants of receiving smaller than requested loan amounts are firm age and size at the time of the first interaction between borrower and bank. Over loan sequences, credit constraints decease most pronouncedly in the beginning of relationships and for the initially young and small firms. Moreover, the structure of the dataset allows me to disentangle the demand and supply effects behind these observed credit constraints. I find that the gap between requested and granted loan amounts decreases because both sides converge. If previous credit constraints were large, requested amounts increase more moderately, while granted amounts increase more strongly than in the case of small previous constraints. The findings are a sign of the use of dynamic incentives at the bank side to overcome information problems when contracting repeatedly with opaque borrowers. The results further suggest that, particularly in the beginning of a bank relationship, borrowers learn from their previous experience with credit constraints and adjust their demand accordingly.
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Suggested Citation

  • Kirschenmann, K., 2010. "The Dynamics in Requested and Granted Loan Terms when Bank and Borrower Interact Repeatedly," Discussion Paper 2010-63, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:40d5005c-1626-4511-aa8a-f4ac10d19f8f
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    Cited by:

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    2. Brown, M. & Serra Garcia, M., 2010. "Relational Contracting Under the Threat of Expropriation – Experimental Evidence," Other publications TiSEM 4c7c42f3-b44d-4327-9556-5, Tilburg University, School of Economics and Management.
    3. Brown, Martin & Serra-Garcia, Marta, 2011. "The Threat of Exclusion and Relational Contracting," Discussion Papers in Economics 12287, University of Munich, Department of Economics.
    4. Brown, M. & Serra Garcia, M., 2010. "Relational Contracting Under the Threat of Expropriation – Experimental Evidence," Discussion Paper 2010-85, Tilburg University, Center for Economic Research.
    5. Martin Brown & Marta Serra-Garcia, 2017. "The Threat of Exclusion and Implicit Contracting," Management Science, INFORMS, vol. 63(12), pages 4081-4100, December.
    6. Memmel, Christoph & Gündüz, Yalin & Raupach, Peter, 2015. "The common drivers of default risk," Journal of Financial Stability, Elsevier, vol. 16(C), pages 232-247.
    7. Steven Ongena, 2014. "Discussion of Presbitero, Udell, and Zazzaro," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 87-91, February.

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    More about this item

    Keywords

    Credit constraints; relationship lending; small business lending; asymmetric information; learning;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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