DP12340 The real effects of relationship lending

Author(s): Ryan Banerjee, Leonardo Gambacorta, Enrico Sette
Publication Date: September 2017
Keyword(s): credit supply, real effects of credit, relationship banking
JEL(s): E44, G21
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12340

This paper studies the real consequences of relationship lending on firm activity in Italy following Lehman Brothers' default shock and Europe's sovereign debt crisis. We use a large data set that merges the comprehensive Italian Credit and Firm Registers. We find that following Lehman's default, banks offered more favourable continuation lending terms to firms with which they had stronger relationships. Such favourable conditions enabled firms to maintain higher levels of investment and employment. The insulation effects of tighter bank-firm relationships was still present during the European sovereign debt crisis, especially for firms tied to well capitalised banks.