DP10050 When Arm?s Length Is Too Far. Relationship Banking over the Business Cycle

Author(s): Thorsten Beck, Ralph de Haas, Hans Degryse, Neeltje Van Horen
Publication Date: June 2014
Keyword(s): business cycle, credit constraints, relationship banking
JEL(s): F36, G21, L26, O12, O16
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10050

Using a novel way to identify relationship and transaction banks, we study how banks? lending techniques affect funding to SMEs over the business cycle. For 21 countries we link the lending techniques that banks use in the direct vicinity of firms to these firms? credit constraints at two contrasting points of the business cycle. We show that relationship lending alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in an economic downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe.