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When Arm’s Length Is Too Far. Relationship Banking over the Credit Cycle

Beck, T., Degryse, H., De Haas, R. and Van Horen, N. (2018). When Arm’s Length Is Too Far. Relationship Banking over the Credit Cycle. Journal of Financial Economics, 127(1), pp. 174-196. doi: 10.1016/j.jfineco.2017.11.007

Abstract

We conduct face-to-face interviews with bank CEOs to classify 397 banks across 21 countries as either relationship or transaction lenders. We then use the geographic coordinates of these banks’ branches and of 14,100 businesses to analyze how the lending techniques of banks in the vicinity of firms are related to credit constraints at two contrasting points of the credit cycle. We find that while relationship lending is not associated with credit constraints during a credit boom, it alleviates such constraints during a downturn. This positive role of relationship lending is stronger for small and opaque firms and in regions with a more severe economic downturn. Moreover, our evidence suggests thatrelationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans.

Publication Type: Article
Additional Information: © 2018, Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Relationship banking, credit constraints, credit cycle
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/16994
[img] Text - Accepted Version
This document is not freely accessible until 21 May 2019 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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