Relationship lending in a financial turmoil

Abstract

We investigate whether the shape of relations between banks and firms has had a detectable effect in mitigating the credit contraction that followed Lehman's default in September 2008. Using micro data on a large sample of Italian firms, we analyze the relation between firms' debt concentration and credit availability. We show that firms borrowing from a higher number of banks suffered on average a larger contraction in bank credit and a higher probability of experiencing a reduction in outstanding bank debt. The same results hold for firms diversifying their borrowing, concentrating a smaller proportion with the main bank. The stability of the bank-firm relationship, measured by its duration, also appears to have been of some value in mitigating the credit restriction. Our results also suggest the existence of a different regime in credit supply towards firms experiencing a reduction in outstanding bank debt. If there is a contraction in credit, the decrease is limited if relations are more intense i.e. a lower number of financial institutions from which the firm borrows, more concentrated lending and relations of greater duration. The opposite is true for firms with positive credit growth.relationship lending, financial crisis