Competition and Relationship Lending: What Happens in Credit Crunch Periods?

Abstract

This paper empirically investigates the relationship between interbank competition, bank orientation and credit availability for a sample of more than 30,000 loans granted by a large banking group operating in the Italian credit market. We test whether and how, during a credit crunch period, competition affects bank orientation and how relationship lending and interbank competition can mitigate the credit crunch problem, for financially distressed firms. Using a unique and large bank-firm level dataset, the main results show that an increase in competition is associated with a stronger relationship in terms of the length of bank-borrower interaction, whereas the distance bank branch-headquarter negatively affect it. Moreover, a strong lender-borrower relationship, in terms of length and exclusivity, is found positively significant in determining the change in the amount of credit granted. Non-linearity and sector specialization effects are tested, too, and report interesting results, supporting the crucial role of relationship lending during a financial crisis.