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Relationship Lending During A Financial Crisis

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  • Enrico Sette
  • Giorgio Gobbi

Abstract

This paper studies whether relationship lending mitigates the transmission of the Lehman default shock to the supply of credit in Italy. Exploiting the presence of multiple banking relationships, we control for banks' and firms' unobserved characteristics. Results show that the growth of credit itself is higher and its cost lower the shorter the distance between the bank and the firm, the longer the relationship, and the higher the share of credit held by the bank. Credit growth by relationship lenders is 4.6% higher than that by transactional lenders; the increase in the cost of credit is 50 basis points lower. The positive effect of relationship lending on credit supply increased during the crisis, compared to a pre-crisis period. The beneficial effect of relationship lending is weaker if the relationship lender is more exposed to the financial crisis, especially when lending to weaker borrowers.

Suggested Citation

  • Enrico Sette & Giorgio Gobbi, 2015. "Relationship Lending During A Financial Crisis," Journal of the European Economic Association, European Economic Association, vol. 13(3), pages 453-481, June.
    • Handle: RePEc:bla:jeurec:v:13:y:2015:i:3:p:453-481
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    File URL: http://hdl.handle.net/10.1111/jeea.12111
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