Relationship and transaction lending in a crisis

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

Relationship and transaction lending in a crisis

License

Citation

Bolton, P, Freixas, X, Gambacorta, L, Mistrulli, P. Relationship and transaction lending in a crisis. 2013. handle: http://hdl.handle.net/10230/21129

This citation was generated automatically.

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.