Bank Heterogeneity and Interest Rate Setting: What Lessons Have We Learned Since Lehman Brothers?
51 Pages Posted: 14 Feb 2012
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Bank Heterogeneity and Interest Rate Setting: What Lessons Have We Learned Since Lehman Brothers?
Bank Heterogeneity and Interest Rate Setting: What Lessons Have We Learned Since Lehman Brothers?
Date Written: October 14, 2011
Abstract
A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank-specific characteristics affect the functioning of the credit market in an economy-wide crisis, when banks may find it difficult to perform the role of shock absorbers. We investigate how bank-specific characteristics (size, liquidity, capitalization, funding structure) and the bank-firm relationship have influenced interest rate setting since the collapse of Lehman Brothers. Unlike the existing literature, which has focused chiefly on the amount of credit granted during the crisis, we look at its cost. The data on a large sample of loans from Italian banks to non-financial firms suggest that close lending relationships kept firms more insulated from the financial crisis. Further, spreads increased by less for the customers of well-capitalized, liquid banks and those engaged mainly in traditional lending business.
Keywords: bank interest rate setting, lending relationship, bank lending channel, financial crisis
JEL Classification: G21, E44
Suggested Citation: Suggested Citation
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