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Relationship Banking: The Borrower's Incentives Channel

Author

Listed:
  • Pejman Abedifar

    (University of St Andrews - School of Management; Khatam University - Tehran Institute for Advanced Studies; Khatam University)

  • Soroush Kamyab

    (Khatam University)

  • Steven Ongena

    (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))

  • Amine Tarazi

    (University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE); University of Limoges - Faculty of Law and Economic Science; Economic Research Forum (ERF))

Abstract

We contribute to the relationship banking literature by uncovering the impact of a prior banking relationship on borrower's incentives to avoid default. As an identification strategy we exploit a proprietary dataset comprising 149,230 mortgage loans tracked monthly over a two-year period in a unique institutional setting that allows us to isolate the influence of borrower's incentives. Our findings indicate that a pre-existing relationship diminishes borrower's default risk by approximately 4%, exclusively attributable to the value of the relationship for the borrowers. This effect persists even during the notable surge in loan defaults during the COVID-19 pandemic. Our results also show that the impact of pre-existing banking relationships on avoiding default is stronger for wealthier, more religious, and male borrowers.

Suggested Citation

  • Pejman Abedifar & Soroush Kamyab & Steven Ongena & Amine Tarazi, 2024. "Relationship Banking: The Borrower's Incentives Channel," Swiss Finance Institute Research Paper Series 24-85, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2485
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5034386
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    More about this item

    Keywords

    Relationship Banking; Borrower's Incentives; Mortgage Loan; COVID-19; Default Risk;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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