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Relationship Banking: The Borrower's Incentives Channel

Author

Listed:
  • Pejman Abedifar

    (Tehran Institute for Advanced Studies, Khatam University, Tehran, Iran)

  • Soroush Kamyab

    (Tehran Institute for Advanced Studies, Khatam University, Tehran, Iran)

  • Steven Ongena

    (University of Zürich, Swiss Finance Institute, Katholieke Universiteit Leuven, NTNU Business School, and CEPR)

  • Amine Tarazi

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

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 preexisting 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," Working Papers hal-04792918, HAL.
    • Handle: RePEc:hal:wpaper:hal-04792918
    Note: View the original document on HAL open archive server: https://unilim.hal.science/hal-04792918v1
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    File URL: https://unilim.hal.science/hal-04792918v1/document
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    More about this item

    Keywords

    Relationship Banking Borrower's Incentives Mortgage Loan COVID-19 Default Risk. JEL Classification: G20 G21; Relationship Banking; Borrower's Incentives; Mortgage Loan; COVID-19;
    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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