Multiple Banking Relationships: Evidence from the Italian Experience

Abstract

Despite the growing theoretical literature on multiple banking relationships, empirical studies investigating the determinants of the number of bank–lending relationships are very scant. The purpose of this paper is to fill this gap. Using a new data set provided by a large Italian bank we provide econometric evidence that the number of banking relationships is increasing in firms’ leverage and in the riskiness of the sector in which the firm operates. This evidence suggests that firms must engage in multiple banking relationships in order to satisfy their demand for leverage and is consistent with an interpretation of the multiple banking relationship ‘puzzle’ based on the behaviour of the bank. A large bank may find it optimal to finance many firms for a small share of their total leverage rather than fully financing a smaller number of firms in order to share risk and to maximize the number of customers.