When Arm's Length Is Too Far. Relationship Banking over the Business Cycle

Using a novel way to identify relationship and transaction banks, we study how banks’ lending techniques affect funding to SMEs over the business cycle. We link, across a large number of countries, the type of lending techniques that banks use in the direct vicinity of firms to these firms’ credit constraints at different points in the business cycle. Using these detailed data, we show that relationship lending alleviates firms’ credit constraints during a cyclical downturn, but not during a boom period. The positive impact of relationship lending in a downturn is strongest for smaller and more opaque firms and holds independently of the legal and institutional environment in which the bank operates. Distance reduces the positive impact of relationship lending.

This event is an Erasmus Finance Seminar. The Erasmus Finance Seminar series brings prominent researchers in Finance from all over the world to Rotterdam.