Paper #1385

Title:

Relationship and transaction lending in a crisis

Authors:

Patrick Bolton, Xavier Freixas, Leonardo Gambacorta and Paolo Emilio Mistrulli

Date:

September 2013

Abstract:

We study how relationship lending and transaction lending vary over the business cycle. We develop a model in which relationship banks gather information on their borrowers, which allows them to provide loans for profitable firms during a crisis. Due to the services they provide, operating costs of relationship-banks are higher than those of transaction-banks. In our model, where relationship-banks compete with transaction-banks, a key result is that relationship- banks charge a higher intermediation spread in normal times, but offer continuation-lending at more favorable terms than transaction banks to profitable firms in a crisis. Using detailed credit register information for Italian banks before and after the Lehman Brothers' default, we are able to study how relationship and transaction-banks responded to the crisis and we test existing theories of relationship banking. Our empirical analysis confirms the basic prediction of the model that relationship banks charged a higher spread before the crisis, offered more favorable continuation-lending terms in response to the crisis, and suffered fewer defaults, thus confirming the informational advantage of relationship banking.

Keywords:

Relationship Banking, Transaction Banking, Crisis

JEL codes:

E44, G21

Area of Research:

Finance and Accounting

Download the paper in PDF format