When Arm's Length is Too Far. Relationship Banking Over the Business Cycle
CentER Discussion Paper Series No. 2014-042
European Banking Center Discussion Paper Series No. 2014-003
52 Pages Posted: 3 Jul 2014
There are 4 versions of this paper
When Arm's Length is Too Far. Relationship Banking Over the Business Cycle
When Arm's Length Is Too Far. Relationship Banking Over the Business Cycle
When Arm's Length is Too Far. Relationship Banking Over the Business Cycle
Date Written: July 2, 2014
Abstract
Using a novel way to identify relationship and transaction banks, we study how banks’ lending techniques affect funding to SMEs over the business cycle. For 21 countries we link the lending techniques that banks use in the direct vicinity of firms to these firms’ credit constraints at two contrasting points of the business cycle. We show that relationship lending alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in an economic downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe.
Keywords: Relationship banking, credit constraints, business cycle
JEL Classification: F36; G21; L26; O12; 016
Suggested Citation: Suggested Citation