Search

Based on a unique database (data on 2529 bank-firm relationships of 403 firms from 2012 to 2018) provided by the Central Bank of Tunisia, this article analyses the impact of the intensity and duration of bank-firm relationship on loan quality. By estimating a panel ordered probit model, the results show that the intensity of the lending relationship has a positive (negative) impact on high (medium or low) quality loans. In addition, the duration of the bank-firm relationship increases the probability of low-quality loans. We also find that the impact of relationship lending on loan quality differs according to the level of profitability of the firm. Low and non-performing firms tend to have longer and closer bank relationship, whereas it is the opposite for performing firms. Our results suggest that in an emerging market concentrated around a few banks, longer and closer banking relationships are mainly in favour of low and non-performing firms, reflecting adverse selection and strong moral hazard. [ABSTRACT FROM AUTHOR]

This study investigates the impact of borrower-lender distance on credit availability for private firms. Utilizing an extensive loan record history, we categorize loans into initial and subsequent borrowings. Our analysis reveals a consistent trend: loan size diminishes with increasing distance, even after accounting for Fintech effects. A noteworthy finding is the divergent role of financial connections. During initial borrowings, they mitigate the adverse effects of distance, while in subsequent borrowings, they become a positive signal to lenders, particularly post-soft information insights. These insights highlight intricate dynamics in credit availability, emphasizing the evolving roles of technology and financial connections in shaping lending relationships for private firms. [ABSTRACT FROM AUTHOR]

In response to the COVID-19 pandemic, Congress in conjunction with the Small Business Administration (SBA) created the Paycheck Protection Program (PPP) to help small business owners retain employees. We improve on previous literature exploring the relationship between bank density and PPP loan dispersion by implementing precisely geocoded data to map loans to commuting zones. Revisiting results in Deming and Weiler (2023), we confirm the statistically significant relationship between bank density and PPP loans per small business. We consider three distinct periods of lending to analyze how changes in the PPP loan program rules might have impacted dispersion. The coefficient in the regression of loans per small business on bank density is largest in the final wave of lending, and in commuting zones with high loan densities. This suggests that having additional bank branches in the commuting zone may have helped facilitate rapid dispersion of relief funds to high demand areas during the program. [ABSTRACT FROM AUTHOR]

How does uncertainty affect the costs of raising finance in the bond market and via bank loans? Empirically, this paper finds that heightened uncertainty is accompanied by an increase in corporate bond spreads, whereas spreads on bank loans remain unchanged. This finding can be explained with a model that includes costly state verification and in which banks maintain long‐term relationships with borrowers and acquire information beyond what is publicly available. After an unexpected increase in uncertainty, the probability of borrower default increases. Banks leave the loan spread unchanged to maintain the relationship. In contrast, bond spreads increase because investors demand compensation for the increased default risk. [ABSTRACT FROM AUTHOR]

We conduct a survey among 1922 Swiss SMEs to analyze their access to bank loans. Credit-constrained SMEs are six times more likely to be discouraged than rejected. The most dominant reasons for being discouraged are too high collateral requirements, cumbersome application procedure, and the expectation of being turned down. Through a unique feature in the Swiss banking market, we also find new evidence for the importance of a strong firm–bank relationship. We challenge the assumption that discouraged borrowers are very similar to rejected borrowers. Our results indicate that the group of discouraged borrowers is more similar to the denied borrowers than to the group of approved borrowers, but only with respect to firm characteristics. For variables describing business development and firm–bank relationship, discouraged SMEs have less in common with credit-constrained firms than with their unconstrained counterparts. Even with a conservative prediction, about 60% of the discouraged firms would have obtained a bank loan if they had applied for one. The self-rationing mechanism observed is thus rather inefficient, and banks and policy makers should think about how to foster SMEs' courage to apply for the bank loans they need. Plain English Summary: For each SME that applied for credit and was rejected, six other firms had a financing need but did not apply. Some 60% of these discouraged firms would have obtained a loan if they had applied for one, even by a conservative prediction. A survey among 1922 Swiss SMEs on their access to bank loans shows that they are more often credit constrained than might be expected. The dominant reasons for being discouraged are too high collateral requirements, cumbersome application procedures, and the expectation of being turned down. We also find new evidence for the beneficial effect of a good firm–bank relationship. Banks and policy makers should consider how to foster SMEs' courage to apply for the bank loans they need in order to sustain or increase both their investments and their workforce. [ABSTRACT FROM AUTHOR]

Using confidential data at the bank–firm loan‐level, we provide direct evidence of the signaling role of trade credit in bank lending decisions. Especially for firms that are opaque in their relationship with banks, the findings reveal that trade credit ameliorates information asymmetries. We address the questions of whether and, if so, how the presence of trade credit affects banks' decisions to grant commercial loans. We base the analysis on a sample of small and medium‐sized enterprises to examine suppliers' informational advantage in screening activities in relation to relationship lending arguments. We provide evidence that supports the role of trade credit as a signaling instrument in lending decisions. More precisely, the analysis suggests that trade credit plays a signaling role, increasing the probability of obtaining a loan. Suppliers bearing credit risk lead banks to lend to firms. Thus, a bank receiving this signal is more likely to grant a loan even though abnormal payment delays are perceived as negative and function as friction during the lending process. This paper has two implications: Banks should use suppliers to signal a "good" type of borrower and for firms, sharing credit information could ameliorate the rationing problems arising in the context of credit asymmetries. [ABSTRACT FROM AUTHOR]

We examine the association between relationship lending and the likelihood of bank loan covenant violations. We find that relationship lending reduces the probability of ex‐post covenant violations. The length of the lending relationships has an inverted U‐shaped effect on the likelihood of covenant violations. The borrowers and lenders both benefit from relationship lending, but long‐term lending relationships weaken the borrower's bargaining power. [ABSTRACT FROM AUTHOR]

This paper focuses on the economic impact of the lender–borrower relationship on loan interest rates and tests whether repeated bank-firm contact significantly reduces these rates. We find strong evidence of the 'relationship intensity' hypothesis, and we detect a contribution of physical contact between banks and firms to loan pricing, controlling for the location where contact occurs. Finally, we report new evidence on the hold-up problem; in particular, we find that under certain circumstances, a closer relationship may alleviate extra borrowing costs. [ABSTRACT FROM AUTHOR]

Do prior lending relationships result in pass‐through savings (lower interest rates) for borrowers, or do they lock in higher costs for borrowers? Theoretical models suggest that when borrowers experience greater information asymmetry, higher switching costs, and limited access to capital markets, they become locked into higher costs from their existing lenders. Firms in Chapter 11 seeking debtor‐in‐possession (DIP) financing often fit this profile. We investigate the presence of lock‐in effects using a sample of 348 DIP loans. We account for endogeneity using the instrument variable (IV) approach and the Heckman selection model and find consistent evidence that prior lending relationship is associated with higher interest costs and the effect is more severe for stronger existing relationships. Our study provides direct evidence that prior lending relationships do create a lock‐in effect under certain circumstances, such as DIP financing. [ABSTRACT FROM AUTHOR]

Loan managers’ trust in entrepreneurs can be a useful tool for overcoming entrepreneurial firms’ opaqueness. Nevertheless, the possibility for loan managers to leverage trust can be affected by differences in the regulative institutions within the banks (type of bank) and by place-bound normative institutions (social context). By relying on semi-structured interviews and a survey of 450 bank-entrepreneur relationships, this study finds that a positive impact of trust in lending relationships is sensitive to different place-bound normative institutions and to the regulative institutions within the banks. The results are robust with respect to potential endogeneity issues. [ABSTRACT FROM PUBLISHER]

Using a novel measure of relationship lending based on the kind of information banks use to assess borrowers, we investigate the role of relationship lending in firms' capital structure. Using a unique dataset of European manufacturing firms, we measure relationship lending based on three dimensions (closeness, soft information, exclusivity) and relate them to firms' leverage. Overall our results support the hypothesis that supply factors matter. We find that the actual use of soft information increases leverage and only firms without soft information-intensive relationships increase their leverage through multiple relationships. However, the effect of relationship lending on leverage varies across countries. [ABSTRACT FROM AUTHOR]

The article analyses the role of local banks in Italy during the 2008–2009 crisis from the perspective of the relationship lending model. During the crisis, the risk of cascading failures of financial organizations has dramatically increased, thus causing a return of attention to local banking as a possible source of countercyclical behaviours in the financial markets thanks to their ability to establish fiduciary long-term relationships with small businesses. The purpose of this article is to test this hypothesis and to disentangle the response of local banks during the financial turmoil according to their governance structure and location. Our results show that non-independent local banks and, to a limited extent, cooperative banks located in the rural area actually played a significant countercyclical role across the crisis. Policy implications suggest that prudential supervision should rethink the indicators of systemic risk in order to differentiate banks according to their capability of mitigating it. [ABSTRACT FROM AUTHOR]

Despite their contribution to job creation, small and medium enterprises (SMEs) are financially constrained. Lenders view SMEs as high risk borrowers and hence demand collateral, but lack of collateral inhibits SMEs access to credit. Relationship lending is believed to lessen collateral requirement and increase SMEs access to credit. However, recent studies question substitutability of relationship lending and collateral. The present study adds to the debate by drawing on the survey of 102 randomly selected manufacturing SMEs in Ethiopia. Our binary logistic regression results suggest that banks in Ethiopia are cautious in extending credit to SMEs, evidenced by simultaneous usage of relationships, collateral and other criteria, suggesting complementarity between collateral and relationship lending. [ABSTRACT FROM AUTHOR]

Asset size does not seem to be a good predictor of bank lending behaviours. An overlooked determinant of lending may be the relationship a bank has with its local community. This article suggests that US banks owned and headquartered in a community are typically central actors in local business networks, and bank executives are intimately connected to their communities. As a result, lending decisions made by banks headquartered in the community often become influenced by the social relations and social networks of bank executives. [ABSTRACT FROM AUTHOR]

This paper investigates if relationship lending and bank market concentration permit informational rent extraction through collateral. We use equity IPOs as informational shocks that erode rent seeking opportunities. Using unique loan data from China, we find collateral incidence increases with relationship intensity and bank market concentration for pre-IPO loans, while these effects are moderated post-IPO. We further discover after an IPO, rent extraction is moderated for safe firms but intensified for risky firms. These results are not driven by differences or changes in financial risks. Ours is the first investigation on collateral determinants for China with loan-level data. [ABSTRACT FROM AUTHOR]

This paper explores the effects of relationship lending on bank stability under perfect bank competition. Relationship banking generates profitable old lending relationships, which ease the stress to search and monitor new borrowers, and create great charter values for banks even under bank competition. These everlasting charter values mitigate risk-taking incentives improving financial stability. We find the maximum growth speed for banks so that they will avoid risk taking, and discover the optimal equity capital requirement: new banks and rapidly growing banks should have relatively more capital. [ABSTRACT FROM AUTHOR]

We examine how time preferences impact the financing decision of firms. We hypothesize that the degree of long-term orientation in a country is positively related to the use of bank relationship lending. Based on a thorough theoretical investigation and an extensive empirical analysis using a large, worldwide dataset, we find strong support for our hypothesis on the role of time preferences for financial intermediation. Our results are robust to controlling for other determinants of the choice of debt financing as well as to applying alternative variables and different estimation methods. Firms in long-term orientation countries appear to prefer relationship bank financing, since it is usually available for the long run and will not be withdrawn quickly in response to adverse developments. This allows managers to preserve a more strategic view and pursue longer planning horizons. [ABSTRACT FROM AUTHOR]

This article empirically investigates the relationship between interbank competition, bank orientation and credit availability for a sample of more than 30 000 loans granted by a large banking group operating in the Italian credit market. We test whether and how, during a credit crunch period, competition affects bank orientation and how relationship lending and interbank competition can mitigate the credit crunch problem, for financially distressed firms. Using a unique and large bank–firm level data set, the main results show that an increase in competition is associated with a stronger relationship in terms of the length of the bank–borrower interaction, whereas the distance bank branch-headquarter negatively affects it. Moreover, a strong lender–borrower relationship, in terms of length and exclusivity, is found positively significant in determining the change in the amount of credit granted. Nonlinearity and sector specialization effects are tested, too, and report interesting results, supporting the crucial role of relationship lending during a financial crisis. [ABSTRACT FROM AUTHOR]

Loans to small firms are associated with relationship lending technologies that may be better supported by smaller banks. Whether competition helps or hinders small firm access to finance may depend on the size distribution of banks and the ways in which banks compete. Using cross-country data from surveys of firms and banks and a measure of contestability evidence is produced for a non-linear relationship between competition and the use of bank financing by small firms. While at very low levels of contestability an increase in contestability increases small firm use of bank finance, for most observations of contestability in the sample, an increase in contestability produces the opposite result. This also holds for medium size firms outside of manufacturing. Medium size firms in manufacturing exhibit a non-linear relationship between competition and use of bank credit, but in an opposing direction. Small firms are also more likely to use bank financing the higher is the small bank market share. However, neither the size distribution of banks nor the level of profitability of lending is shown to further influence the effect of contestability on small firm use of bank lending. [ABSTRACT FROM AUTHOR]

A puzzling but consistent result in the empirical literature on banking is that firms with close bank ties do not grow faster than bank-independent firms. In this paper, we reconsider the link between relationship lending and firm growth, distinguishing firms by size and expansion/contraction conditions. The idea is that the beneficial effects of relationship lending on information asymmetries can be compensated by other negative capture, risk, and externality effects which make relational banks reluctant to support long-term growth projects of client firms, and that the strength of these compensating effects varies with firm size and health status. We explore the influence of long-lasting bank relationships on employment and asset growth of a large sample of Italian firms. The main finding is that relationship lending hampers the efforts of small firms to increase their size, while it mitigates the negative growth of troubled, medium-large enterprises. [ABSTRACT FROM AUTHOR]

We experimentally examine to what extent long-term 'lender-borrower' relationships mitigate moral hazard. The originality of our research lies in recruiting not only students but also commercial and social bankers. The opportunity to engage in bilateral long-term relationships mitigates the repayment problem. Lenders take advantage of their long-term situation by increasing their rates. Consequently, borrowers are incited to take more risk. Improving information disclosure ameliorates the repayment but does not incite lenders to offer more credits. Social bankers exhibit a higher probability of granting a loan and make fairer credit offers to borrowers than the other subject pools do. [ABSTRACT FROM AUTHOR]

The lending-rate differentials between loans to small and large companies are striking. According to several studies, these disparities of loan rates are primarily a result of a lower informational efficiency at small companies. This study examines to what extent such differences in loan rates are caused not only by informational inefficiencies, but also by operational costs and the borrower's negotiation power. By using unique, hand-collected data from the credit-pricing models of 15 Swiss regional banks, we provide new empirical evidence that operational costs are a key factor in explaining differences in lending rates between small and large enterprises. Furthermore, we also found that the lack of negotiation power of small enterprises-expressed in the profit margin amount of the bank-has significant explanatory power. [ABSTRACT FROM AUTHOR]

We investigate minority access to small-business loans using a probit model of loan application denial that recognizes two loan types (line-of-credit loans and non-line-of-credit loans) made by two lender types (commercial banks and nonbank financial institutions). We estimate our model on data from the 1998 Survey of Small Business Finances. We find evidence consistent with minority equal access to bank credit lines and nonbank non-line-of-credit loans in highly competitive loan markets; in less competitive markets we find evidence consistent with unequal access to these loans. We also find evidence consistent with unequal minority access to bank non-line-of-credit loans, regardless of loan market competitiveness. Our findings differ from previous research which treats small-business loans as a homogenous product and finds evidence consistent with unequal minority access to small-business loans generally. We argue that the existence of multiple small-business lending technologies and loan specialization by lenders account for our findings and demonstrate the need to treat small-business loans as a heterogeneous product when investigating equal access to small-business credit. [ABSTRACT FROM AUTHOR]

By applying factor analysis to unique data on loan screening for small and medium-sized enterprises (SMEs) in Japan, we investigate the factors that banks actually evaluate when underwriting commercial loans. We find that banks emphasize three factors when they decide whether to grant loans: the relationship factor, the financial statement factor, and the collateral/guarantee factor. We also find that smaller banks place greater emphasis on the relationship and the collateral/guarantee factors, and that banks under competitive pressure emphasize the relationship factor to a greater extent. We interpret these findings based on the theory of relationship lending and lending technologies. [ABSTRACT FROM AUTHOR]

Banks specialize in lending to informationally opaque borrowers by collecting soft information about them. Some researchers claim that this process requires a physical presence in the market to lower information collection costs. This paper provides evidence in support of this argument in the mortgage market for low-income borrowers whose access to credit is limited by their inadequate credit histories. Mortgage originations increase and interest spreads decline when there is a bank branch located in a low- to moderate-income neighborhood. [ABSTRACT FROM AUTHOR]

Switzerland is one of the countries with the highest concentration of bank–customer relationships. The present paper seeks to find out whether this can be explained by the structure of Swiss firms or by the organization of the Swiss banking market. Using survey data from small and medium-sized enterprises in 1996 and 2002, we examine the influence of firm-, loan-, and bank-specific variables on the number of banking relationships. We find that firm and industry structure have the largest explanatory power, while banking market structure and conduct play a minor role. Relationship lending by state-owned cantonal banks and small regional banks tends to enhance the concentration of banking relationships. [ABSTRACT FROM AUTHOR]

Using unique small business credit-file data from a major Finnish bank, I analyze how relationship characteristics are associated with loan interest rates. Data includes the effective loan rate and variables that describe the duration and scope of relationship, collateralization, firm characteristics, bank’s internal risk rating, and loan characteristics. The results show that longer duration tends to lower the cost of credit and that a long-term bank/firm relationship is beneficial especially to high-risk firms. As the relationship matures, the loan premiums for high-risk firms decrease at higher rate than for low-risk firms. [ABSTRACT FROM AUTHOR]

According to the ‘broad credit view’ bank-dependent firms are more strongly affected by monetary contractions than firms with access to non-bank forms of external finance. Within the credit view the bank lending channel focuses on the special role of bank loans, and predicts that monetary contractions reduce loan supply to firms facing information problems. However, the ‘relationship lending channel’ argues that, especially in bank-based economies, bank-dependent firms have close ties with banks, which may reduce the sensitivity of their use of bank debt to monetary shocks. The sensitivity of corporate debt structures to changes in the monetary policy stance is analysed using a sample of 22,000 firms in the Euro area and the UK. Evidence is found for the credit view, the relationship lending channel, but not for the bank lending channel. [ABSTRACT FROM AUTHOR]

The theory of financial intermediation assigns banks a unique role in the resolution of information asymmetry. Banks, in general, obtain private information about the borrower and the project during the screening of loan applicants and during the monitoring of loan recipients. Incumbent banks, in particular, utilize information obtained while monitoring previous loan extensions to resolve information asymmetry when granting subsequent loans. We examine the rate on a sequence of loans to a borrower and find that the incumbent bank information advantage has finite magnitude and is quickly reflected in the pricing of the second loan. We also find that the lending relationship does not deteriorate to the detriment of the borrower. This study also provides further evidence supporting the hypothesis that an incumbent bank resolves information asymmetry during the monitoring of loan extensions. [ABSTRACT FROM AUTHOR]

We study the determinants of the incidence of relationship lending. For our study, we combine established insights from the study of Elsas with empirical banking relationship lending literature. We relate loan contract and borrower characteristics to self-assessments of Tunisian banks with respect to the existence of close relationship. Using detailed loan contract information from Tunisian banks and a questionnaire addressed to loan officers, we report the first comprehensive evidence on the development of relationship lending. We find that access to information, the ability to influence the manager, and the solvency of the company are relevant factors. While the exclusivity and the duration of the relationship, classic measures of the existence of close ties with the bank, are not determining factors. So these proxy measures should be used with caution in future empirical works. [ABSTRACT FROM AUTHOR]