We test hypotheses about the effects of bank size, foreign ownership, and distress on lending to informationally opaque small firms using a rich new data set on Argentinean banks, firms, and loans. We also test hypotheses about borrowing from a single bank versus multiple banks. Our results suggest that large and foreign-owned institutions may have difficulty extending relationship loans to opaque small firms. Bank distress appears to have no greater effect on small borrowers than on large borrowers, although even small firms may react to bank distress by borrowing from multiple banks, raising borrowing costs and destroying some relationship benefits.

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While the concept of customer lending relationships in banking has generated a great deal of recent attention, one gap in the empirical literature is that linking current lending business and the sale of “other products”. Specifically, does establishing a lending relationship today add value for the bank by increasing the probability of attracting future business from the same customer? Indeed, many bankers view the generation of additional business as the principal reason for engaging in relationship lending. Our results show that a lender that has a strong relationship with a borrower has far greater odds of providing it with future loans compared to a lender lacking such a relationship. Existence of lending relationships are also strongly associated with an increased probability of winning future debt underwriting business from the same customer. Prior lending relationships also translate into a higher likelihood of a winning a co-manager role on equity underwritings. While loans to relationship borrowers have a 10-16 basis points lower interest rate, the fees on investment banking services tend to be up to 14 % higher. In sum, we document direct and measurable evidence of the value of relationships to lenders.

Does repeated borrowing from the same lender affect loan contract terms? We find that such borrowing translates into a 10 to 17 bps lowering of loan spreads. These results hold using multiple approaches (Propensity Score Matching, Instrumental Variables, and Treatment Effects Model) that control for the endogeneity of relationships. We find that relationships are especially valuable when borrower transparency is low and the moral hazard among lending syndicate members is high. We also provide a demarcation line between relationship and transactional lending. We find that spreads charged for relationship loans and non-relationship loans become indistinguishable if the borrower is in the top 30 % when ranked by asset size. Similar dissipation of relationship benefits occurs if the borrower has public rated debt or is part of the S&P 500 index. We find that past relationships reduce collateral requirements. Relationships are also associated with shorter debt maturity especially for the lowest quality borrowers. Our results are robust to an estimation methodology which allows loan spread, collateral requirements, and loan maturity to be determined jointly using an instrumental variables approach. We also find relationship borrowers obtain larger loans (scaled by the borrower’s asset size) compared to non-relationship borrowers. Our results imply that, even for firms that have

Abstract: We review how deregulation, technological advance, and increased competitive rivalry have affected the size and health of the U.S. community banking sector and the quality and availability of banking products and services. We then develop a simple theoretical framework for analyzing how these changes have affected the competitive viability of community banks. Empirical evidence presented in this paper is consistent with the model’s prediction that regulatory and technological change has exposed community banks to intensified competition on the one hand, but on the other hand has left well-managed community banks with a potentially exploitable strategic position in the industry. We also offer an analysis of how the number and distribution of community banks may change in the future.

This paper analyses the impact of asymmetric information in the interbank market and establishes its crucial role in the microfoundations of the monetary policy transmission mechanism. We show that interbank market imperfections We thank an anonymous referee for very helpful comments and suggestions. We are also grateful

A recent string of theoretical papers highlights the importance of geographical distance in explaining loan rates for small firms. Lenders located in the vicinity of small firms face significantly lower transportation and monitoring costs, and hence considerable market power, if competing financiers are located relatively far from the borrowing firms. We directly study the effect on loan conditions of geographical distance between firms, the lending bank, and all other banks in the vicinity. For our study, we employ detailed contract information from more than 15,000 bank loans to small firms and control for relevant relationship, loan contract, bank branch, firm, and regional characteristics. We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending. Loan rates decrease in the distance between the firm and the lending bank and similarly increase in the distance between the firm and competing banks. The effect of distance on the loan rate is statistically significant and economically relevant, is robust to changes in model specifications and variable definitions, and is seemingly not driven by the modest changes over time in lending technology we infer. We deduce that transportation costs are causing the spatial price discrimination we observe.

This paper examines whether community banks have a niche in the production of soft information for their small business customers and if small firms value the banks ’ investment in this information. A composite measure of soft information production is created based on owner ratings of bank performance characteristics using survey data from over 1,400 small firms. This composite measure is related to the size of the owner’s primary bank, a measure of the intensity of market competition, proxies for the strength of banking relationships, and the owner’s willingness to pay for the production of soft information. These ratings are found to be significantly higher if the owner currently banks at a CFI and has stronger banking relationships, but significantly lower if the presence of more market competition. No conclusive evidence is found regarding owner’s willingness to pay for soft information production, which suggests that the higher quality soft information produced by community banks is not valued highly by small firms.

We study a unique database allowing us to follow each borrower and bank through an extended period of time. As a result, we can document the full dynamic cycle of conditions and behavior before and after firms switch banks. Our findings suggest that engaging a new outside bank decreases the rate paid on a new loan by more than 50 basis points. The new bank is willing to decrease loan rates further by another 35 basis points within the next year and a half. After that the new bank starts hiking its loan rate, slowly at first but eventually at a clip of more than 30 basis points per year. After four years the loan rate charged by the new bank equals what the switcher obtained from its former inside banks before switching. We also find that outside banks attribute the best credit rating to the entire pool of new customers, in contrast to the current inside lenders of the firm whose discriminating ratings effectively determine the offered loan rates. Although the information-sharing regime in place allows the outside banks to attract mostly performing firms, outside banks still suffer from adverse selection because the credit information available is limited to two months

We study the difference between loan sales and credit default swaps. After making a loan, a bank finds out if the loan needs contract enforcement (“monitoring”) and if the bank should lay off the risk so as to release regulatory capital. A bank can lay off credit risk by either selling the loan or by buying insurance through a credit default swap (CDS). With a CDS, the originating bank retains the loan’s control rights but no longer has incentive to monitor; with loan sales, control rights pass to the buyer of the loan, who can then monitor, albeit in a less-informed manner. For high levels of credit risk, only loan sales are used in equilibrium; risk transfer is efficient, but monitoring is excessive. For low levels of credit risk, CDS and loan sales may coexist, in which case risk transfer is efficient but there is no monitoring; in another equilibrium, only poor quality loans are sold, so risk transfer is inefficient while monitoring is optimal. In a two period setting, a reputational equilibrium may be possible if credit risk is low, but not too low. In the first period, the bank uses CDS and efficient monitoring and risk transfer are achieved. In the second period, however, first period defaults are “punished” as noisy signals of shirked monitoring, with no use of CDS, inefficient risk transfer, and monitoring of sold loans.