Relationship Lending During a Trust Crisis on the Interbank Market: A Friend in Need Is a Friend Indeed

Abstract

We exploit uncertainty regarding banks' involvement in money laundering activities as a natural experiment to study the functioning of the interbank market in uncertain times. We show that bank couples with a stronger relationship (i.e., more frequent and reciprocal interactions before the event) are more likely to continue lending to one another, and at lower interest rates. This is in line with a "helping hand" or "flight to friends" hypothesis during crisis.

Keywords: banks, interbank market, trust crisis, relationship banking, helping-hand hypothesis

JEL Classification: G21