Termination of Bank-Firm Relationships

Abstract

Using a matched sample of Japanese banks and firms, we examine what factors determine the termination of the bank-firm relationship. The constraints on bank capital in a Japanese banking crisis increased relationship terminations, implying the presence of a capital crunch in it. Moreover, the "flight-to-quality" behavior of bank prevailed instead of "evergreening" in relationship terminations. We also found that a longer duration of the relationship strongly decreased the probability of termination when Japan's banking system was stable. Such duration effects weakened when the system was fragile, however, the longer duration still had the intertemporal smoothing effects of loan prices