Abstract

We study how relationship lending and transaction lending vary over the business cycle. We develop a model in which relationship-banks gather information on their borrowers, which allows them to provide loans to profitable firms during a crisis. Due to the services they provide, operating costs of relationship-banks are higher than those of transaction-banks. Relationship-banks charge a higher intermediation spread in normal times, but offer continuation-lending at more favourable terms than transaction banks to profitable firms in a crisis. Using credit register information for Italian banks before and after the Lehman Brothers' default, we test the theoretical predictions of the model.

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Citation

Bolton, Patrick, Xavier Freixas, Leonardo Gambacorta, and Paolo Mistrulli. "Relationship and Transaction Lending in a Crisis." Columbia Business School, February 8, 2016.

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