“Time for a Change”: Loan Conditions and Bank Behavior when Firms Switch Banks

Abstract

This paper studies loan conditions when firms switch banks. Recent theoretical work on bank-firm relationships motivates our matching models. The dynamic cycle of the loan rate that we uncover is as follows: a loan granted by a new (outside) bank carries a loan rate that is significantly lower than the rates on comparable new loans from the firm's current (inside) banks. The new bank initially decreases the loan rate further but eventually ratchets it up sharply. Other loan conditions follow a similar economically relevant pattern. This bank strategy is consistent with the existence of hold-up costs in bank-firm relationships.

On the Non-Exclusivity of Loan Contracts: An Empirical Investigation

“…The initial bank might temporarily become more aggressive in an attempt to win the "switching" borrower back. (This is in fact consistent with evidence in Ioannidou and Ongena (2010) who find that subsequent loans to "switching" customers are priced even more competitively than the first loan. )…”

“…Figure 2 reports the number of treated firms in each year as a percentage of the firms with an exclusive lending relationship for which the internal limit is not binding. As can be observed in Figure 2, this percentage is fairly constant over time, ranging between 4.5% and 5.5%, which is comparable to rates found in other studies (e.g., Ioannidou and Ongena (2010) and Farinha and Santos (2002) report rates of 4.5% and 4% per year using data from Bolivia and Portugal, respectively).…”

“…The model is estimated using OLS with the standard errors clustered at the treated firm-level. Because each treated firm can be matched with multiple firms, the point estimates are adjusted by weighting the observations by one over the number of matched control firms for each treated firm as in Ioannidou and Ongena (2010). 24 A negative and statistically significant α indicates that banks decrease their loan supply when a firm originates a loan from another bank, consistent with the theories on contractual externalities and H1.…”

Why Do Firms Switch Banks? Evidence from China

“…As Ioannidou and Ongena (2010) argue turning to a new bank is a defining moment for both the firm and its current lenders, firms often take the strategic decision at the highest level.…”

“…In addition to the determinants of switching, Ioannidou and Ongena (2010) focus on 'the time to change' and study the loan conditions and bank behaviour when firms change lenders.…”