The Real Effects of Relationship Lending

Abstract

This paper studies the real consequences of relationship lending on firm activity in Italy following Lehman Brothers' default shock and Europe's sovereign debt crisis. We use a large data set that merges the comprehensive Italian Credit and Firm Registers. We find that following Lehman's default, banks offered more favourable continuation lending terms to firms with which they had stronger relationships. Such favourable conditions enabled firms to maintain higher levels of investment and employment. The insulation effects of tighter bankfirm relationships was still present during the European sovereign debt crisis, especially for firms tied to well capitalised banks.

Relationship lending and access to financial services by SMEs in Kenya

“…Based on these findings, the study rejected null hypothesis that relationship lending has no statistically significant effect on access to financial services among SMEs in Kenya. The study findings supports those by Veiga and McCahery (2019), Banerjee et al (2017) and Behr et al (2017) whose findings proposes that lengthier lending relationships definitely benefits in increasing loan access by lessen information asymmetries hence borrowers give less collateral and pay low rates of interest. Relationship between bank and borrower guarantees reduction in agency complications, improvement in flexibility in contracts and enhances confidentiality climate by formation of reputation and improved control.…”

“…The study finding support those by Erdogan (2019) and International Trade Centre ( 2018) who argued that SMEs find it harder to access credit services because of failure to establish relationship with banks. In the same line support came from Behr et al (2017) and Banerjee, Gambacorta and Sette (2017) whose findings also proposes that lengthier relationships amid borrower and lender definitely benefits in lessen information asymmetries hence benefitting borrowers' access to financial services.…”

How do bank-specific characteristics affect lending? New evidence based on credit registry data from Latin America

“…For Italian banks, Bolton et al (2016) find that relationship banking is an important mitigating factor in a crisis and that banks with a larger equity cushion are able to perform their relationship-banking role more efficiently. Banerjee et al (2017) analyse the real effects of relationship banking in Italy. They find that following Lehman's default, banks offered lending terms that were more favourable to firms with which they had stronger relationships and that such conditions helped firms maintain higher levels of investment and employment.…”

Shock Transmission through Cross-Border Bank Lending: Credit and Real Effects

“…Recent studies further document the protective role of relationship lending using more direct measures of bank-firm relations. Sette and Gobbi (2015) find greater volumes and lower prices during the 2007-2009 financial crisis for new loans originated by Italian banks to their closer borrowers (measured by physical distance, banking relationship length and the bank's existing credit exposure), with positive real effects for those borrowers (see also Banerjee, Gambacorta and Sette (2017)). In addition, the positive effects of relationship lending on credit standards are stronger during crises than during tranquil periods.…”