Relationship Banking Research Articles

Relationship lending and the role of loan officers in China: Empirical analysis based on the data on companies in industrial clusters

Relationship lending refers to lending behavior in which a financial institution makes loan decisions based on the accumulated soft information on the borrower. Empirical studies have revealed the positive effect of relationship lending. However, questions concerning who generates and accumulates soft information and in what ways in China have never been analyzed empirically. This paper empirically aims to explain whether loan officers generate soft information in relationship lending using data collected through surveys conducted among SMEs in the apparel industry clusters in Zhejiang and Jiangsu provinces. Based on the results of this study, relationship banking in China, which deals with the role of loan officers, seems even more important than is generally recognized.

Are Risky Banks Disciplined by Large Corporate Depositors?

AbstractWe analyze depositor discipline using auctions of unsecured money market deposits of firms to banks. In each auction, only the firm observes the banks and their interest rate bids. We observe that deposit interest rate bids increase with bank risk. Conditional on the same interest rate bid and firm–bank relationship, depositors select less risky banks. Banks reduce their risk after their deposit offers are less often selected. Risky banks eventually exit the market, and reenter when they become safer. This has important implications for banks’ access to unsecured corporate funding, financial stability, and our understanding of market discipline more broadly.

Contesting focality in global health governance: The World Health Organization-World Bank relationship in historical perspective

Focal organisations are typically seen as the undisputed leaders in addressing specific cooperation problems. However, as global governance becomes increasingly fragmented and contested, even well-established organisations are now facing challenges to their traditionally unquestioned focality. Drawing on new theoretical insights, the article contends that the contestation of focal organisations is not a new phenomenon. On the contrary, most focal organisations experience challenges to their focality from their very establishment. At the same time, focal organisations are likely to respond to these challenges with tailored, ad hoc strategies. The article tests these expectations in the case of the global health governance complex, where the initial focality of the World Health Organization was contested by various actors since the outset. Among those contesting the World Health Organization’s focality, a prominent position was gained by the World Bank. By examining the interinstitutional relationship between the World Health Organization and the World Bank from the 1970s onwards, the article shows how this dynamic impacted the World Health Organization’s focality and influenced the broader evolution of the global health complex over the past decades.

Collapse of Silicon Valley Bank: Impacts on Startups & Global Financial Markets, Comparison Between Lehman Brother and Silicon Valley Bank Crises

The sudden collapse of Silicon Valley Bank (SVB) sent shockwaves through the startup ecosystem and the global financial landscape. This research delves into the factors that led to SVB's downfall, exploring how its unique role in supporting tech startups became a double-edged sword. By examining the parallels between SVB's crisis and the infamous collapse of Lehman Brothers in 2008, we uncover important lessons about risk management and the fragility of financial institutions. The fallout from SVB's failure didn't just affect its immediate clients; it rippled through the entire venture capital community and beyond, prompting startups to rethink their banking relationships and funding strategies. We reflect on the broader implications for the financial industry and the lessons learned about the need for diversification and sustainable growth. Ultimately, this research is a reminder of the interconnectedness of our financial systems and the human stories behind the numbers. As we navigate an ever-changing economic landscape, the insights gained from SVB's collapse will shape the future of banking and entrepreneurship for years to come.

Does state affiliation create information advantage to financial analysts

PurposeRecent studies have documented the significant influence of investment bank relationships on the forecast accuracy of affiliated analysts. However, the literature primarily focuses on investment bank-firm relationships, such as whether the investment bank has underwriter or lending relationships with firms. Little attention has been paid to the impact of investment bank-state relationships. To fill this gap in the literature, this paper investigates whether investment bank-state relationships create an information advantage for affiliated analysts.Design/methodology/approachWe empirically test the information advantage of state-affiliated analysts using a large sample of analyst forecasts from China spanning the period 2008 to 2020. Specifically, we investigate whether state-affiliated analysts issue more accurate and timely forecasts around macro events. To address endogeneity concerns, we examine instances where analysts move between state-affiliated and non-affiliated banks, as well as changes in the controlling structure of investment banks.FindingsWe find that state-affiliated analysts demonstrate greater accuracy in forecasts driven by macro events, indicating their information advantage. This effect is more pronounced under conditions of heightened economic policy uncertainty and closer ties between investment banks and the state. After transitioning to a non-state-affiliated investment bank, analysts no longer maintain the ability to make superior macro-event-driven forecasts. Conversely, when the investment bank's affiliation changes from non-state to state, financial analysts gain an information advantage following the establishment of new state affiliation. Additionally, state-affiliated analysts tend to issue more assertive forecasts in response to macro events, which are subsequently echoed by their peers. Furthermore, this information advantage is recognized by investors, enhancing stock price informativeness.Originality/valueFirstly, we contribute to the literature on the economic implications of state ownership in financial intermediaries. Secondly, we enrich the existing literature on financial analysts by acknowledging the pivotal role of investment bank relationships in shaping analysts' behaviors. Lastly, unlike existing literature that treats forecasts driven by macroeconomic events and those influenced by firm-specific events as a homogeneous category, this study contributes to the literature by innovatively categorizing analyst forecasts into two distinct types.

Bank relationship and contractual flexibility: Evidence from covenant enforcement

AbstractThis paper investigates how banks utilize soft information to provide contractual flexibility in loan covenant enforcement. We find that relationship lenders are significantly less likely than non‐relationship lenders to enforce covenants for material violations when borrowers are potentially in breach of financial covenants. The mitigation of information asymmetry by relationship lending, as opposed to alternative explanations, serves as the underlying mechanism. Furthermore, relationship borrowers with potential covenant breaches are less likely to experience increases in loan interest rates after renegotiation, to adopt conservative financial or investment policies, or to file for bankruptcy. Following potential covenant breaches of borrowers, relationship banks are better able to preserve regulatory capital and secure future lending business. Our findings suggest that soft information accumulated during lending relationships is vital for banks to provide contractual flexibility.

Does money buy innovation? The effect of the “Innovative City” pilot on firm innovation in China

This study investigates the “Innovative City” pilot in China and its impact on fostering firm innovation by alleviating financial constraints. Employing difference-in-differences-in-differences approach, we provide strong evidence that the policy significantly boosted firm innovation capabilities, measured by increased patenting. A key mechanism is the program's expansion of bank credit access for firms, particularly benefiting financially constrained firms. Furthermore, the positive impact is amplified in regions with more developed banking sectors and for firms with pre-existing bank relationships, highlighting the role of market frictions. These findings highlight the pivotal role of a competitive and transparent credit market.

The Role of Social Media Engagement in Customer Service: A Study on the Brazilian Financial Sector

This article investigates the importance of social media in customer service and relationships, causing engagement with the brand. For this, this research's corpus delimited the actions on social media of the five largest banks in Brazil in terms of customer volume. The data were collected and analyzed in two moments: first, through a structured questionnaire to test the use and importance of social media in the service and relationship of banks; second, through the collection of interaction and conversation data on the social media of each bank studied. The quantitative and descriptive research uses correlation and engagement analysis based on social media metrics. The results indicate the banks' different strategies to provoke engagement and relationship with their consumer audiences in each media, but the data reveal low engagement. However, consumers pointed out social media's relevance in seeking services and relationships with their banks, citing the convenience, speed, and accessibility it provides. The study concludes that consumers value banks' social media, especially looking for customer service and relationships. In contrast, interaction and conversation data showed that banks have a routine of working in this category, combining others with their products' promotion and sponsorships and events. However, it became clear that the engagement that the banks' social media actions generate is minimal, in proportion to the volume of their followers.

Fast payment, credit and bank diversification: the impact of Pix adoption on the local credit market structure

PurposeIn this article, the research objective is to empirically investigate the effect of the adoption of the Brazilian instant payment system, Pix, on the local credit market structure and the diversification of the banking system in Brazilian municipalities.Design/methodology/approachBy analyzing the data, in this study, we compile and align data from supervisory and public sources, covering the period from 2019 to 2022 in Brazil. As of 2014, Brazil was comprised of 5568 municipalities distributed across five regions: North (450 municipalities), Northeast (1792), Midwest (467), Southeast (1668) and South (1191), according to the Brazilian Institute of Geography and Statistics (IBGE). Our analysis relies on the volume and quantity of Pix to the outstanding credit operations in Brazil.FindingsThis article provides evidence that the widespread adoption of Pix has impacted the financial structure of municipalities. This analysis of banking concentration in the country and municipalities, based on banking relationships, helped us assess whether the adoption of Pix had any correlation with the increase in credit lines. Overall, the results from the statistical tables suggest that the adoption of Pix may be having a positive impact on the local credit market structure.Originality/valueThe originality contribution of the study is to initiate an investigation into the impact of this instant payment system, Pix, on the Brazilian reality. Pix was launched in 2020, amid the COVID-19 pandemic, and had significant numbers, such as over 61% of the adult population having at least one Pix key registered in a little over a year; about 100 million people made at least one payment with Pix; and more than 1.4 billion transactions per month, with 72% between individuals, as presented by the REB 2021.

The moderating effect of private information on the relation between financial reporting quality and corporate dividend efficiency

AbstractWe examine the effect of private information on the linkage between financial reporting quality and dividends. While prior studies show that better reporting quality mitigates agency problems regarding dividends, this effect can depend on capital suppliers' private information sources. In a sample of Japanese firms, we measure dividend efficiency regarding over‐ and underpayments and use unique main bank relationships as a proxy for private information. Reporting quality enhances dividend efficiency, and this linkage is observed only for firms without main bank relationships. The results suggest that high‐quality reporting streamlines dividends, particularly when capital suppliers do not have private information sources.

Does banking relationships promote environmental, social, and governance performance? Empirical evidence from A‐share listed firms in China

AbstractThis study investigates the impact of banking relationships on corporate environmental, social, and governance (ESG) performance using data from A‐share listed firms in China from 2009 to 2019. Results show that banking relationships negatively impact corporate ESG performance. Mechanism analysis finds that banking relationships increase agency costs and financial investment, thereby diminishing ESG performance. Corporate executives with banking backgrounds and banks holding firm shares dampen ESG performance, whereas firms holding bank shares do not yield significant impact on ESG performance. Our study also finds that the negative impact of banking relationships on ESG performance is mitigated by analyst attention and supervisory institutional investors.

Financial statement disaggregation and bank loan pricing

We analyze whether the disaggregation quality (DQ) of a borrower's financial statement is associated with its bank loan pricing. We find that firms with high DQ have low spreads on their bank loans. This result is more pronounced for firms with positive financial prospects, higher risk, and no prior banking relationship with the lenders. Moreover, a high DQ is associated with a low total cost of borrowing, high credit rating, and low spreads on bond issues. Overall, our results show that disaggregated financial statements facilitate bank loan pricing by enabling lenders to make better predictions of their borrowers’ future performance.

Impact of Technological Progress on Consumer Trust and Adoption of E-Banking

Abstract: In this research paper, I have thoroughly described the topic “Impact of Technological Progress on Consumer Trust and Adoption of E-Banking”. The financial services sector has seen a transformation due to the advent of technology improvements, especially with the increasing use of electronic banking, or e-banking. Traditional banking methods have been transformed by the advancement of digital technology, which has made it easier to create complex financial systems and services that are available via a variety of electronic devices. But even as these developments provide potential, a serious worry emerges about the complex relationship that exists between e-banking adoption, customer trust, and technical improvement. Building effective banking relationships requires a lot of trust, particularly in the digital sphere where fraud, privacy, and data security are major problems. The increasing dependence of customers on e-banking for financial operations necessitates a high degree of trust between the technology and the organizations providing these services. However, customer opinions of security, dependability, usability, and overall value are just as important in determining whether or not e-banking is adopted as a banking option as technical developments. To create an environment that is favorable for digital financial services, financial institutions and regulators need to understand the subtleties of customer trust and how it affects the adoption of e-banking in the context of technical improvements. In order to shed light on the opportunities, problems, and consequences in the rapidly changing field of digital finance, this paper will examine the complex relationship that exists between technological advancement, consumer confidence, and acceptance of e-banking. The abstract emphasizes the symbiotic link between trust and adoption, indicating that as trust in e-banking services grows, so does the adoption rate, underscoring the importance of technology innovation in reshaping the banking landscape.

Pledgeability and bank lending technology

What is the effect of an expansion of eligible collateral on different lending technologies? We show that expanding eligible collateral (i) increases transactional (T) banks’ interest income and decreases relationship (R) banks’ interest income, (ii) increases average loan volume more for T- than for R-banks, (iii) decreases average loan risk and (iv) decreases T-banks’ non-interest income while it increases R-banks’ non-interest income. (v) In sum, T-banks’ profitability increases and R-bank’s profitability remains unaffected. Expanding the set of collateral from immovable to movable assets typically benefits SMEs because it allows them to obtain secured loans instead of unsecured ones. A-priori, it is unclear whether SMEs will continue borrowing from R-banks or switch to T-banks. R-banks benefit from customer relationships and T-banks have the collateral screening technology in place. We show that competition between T- and R-banks gives T-banks a comparative advantage, but R-banks can substitute lost interest income with non-interest income.

Financial distress, bank branching deregulation, and customer-supplier relationships

The paper exploits the deregulation of interstate bank branching laws to examine whether improved access to bank credit for customer firms affects the probability of their suppliers' financial distress. The study provides robust evidence that suppliers' financial distress risk is lower when the states of their major customer firms experience bank branching deregulation. Furthermore, the study shows that customers establish new bank relationships and improve liquidity conditions, while suppliers offer less trade credit to customers, reduce leverage, and increase capital expenditures following customer state's bank branching deregulation. The effect of customers' improved access to credit on suppliers' distress risk is more pronounced for supplier firms with stronger customer-supplier relationships, for financially constrained suppliers, and for suppliers whose customers are financially unconstrained. Overall, the findings highlight the importance of customers' access to credit on the financial distress risk of their suppliers.

Strategic Alliances and Lending Relationships

ABSTRACT We study how proprietary information flows in strategic alliances facilitate banks’ information collection in private debt markets. We argue that lenders that have previously worked with a borrower’s alliance partners have an information advantage and show that firms entering a strategic alliance receive a lower interest spread on loans from banks that have previously lent to their strategic partners than loans from other banks. Cross-sectional tests on alliances’ economic importance and participants’ information environment support our hypothesis that the loan price effect is driven by reduced information asymmetry between borrowers and their partners’ relationship banks. Last, we find borrowers are more likely to obtain debt financing from alliance-related banks than from other banks. Overall, our findings are consistent with lenders that have previously worked with an alliance counterparty possessing debt contracting-relevant information about the soft nature of alliance value and the partners’ commitment to alliances. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G10; G21; G32.

Bank Relationships and the Geography of PPP Lending

Bank Relationships and the Geography of PPP Lending

Impact of economic crises on corporate‐banking relationship: Evidence from Korea

AbstractThis study tries to identify the impact of recent economic turmoil including the COVID‐19 pandemic and global financial crisis on a corporation's banking relationships. Using a wide range of unique data from 2008 to 2020 in the Korean loan market, this study compares the two crises periods to the ordinary periods. It is found that the effects of firm‐specific factors on banking relationships are strengthened (for loan amount) or weakened (for corporate size and credit rating) during the two crises. However, for the industrial sector a firm belongs to, the interaction effects of the crises show opposite signs.

Beyond the monolith: a taxonomy of relationship banking models and segmentation levels in SMEs

Purpose This study aims to investigate the reality of relationship banking (RB) in the small and medium enterprise (SME) context, specifically how banks organize activities, define SMEs and manage the SME–banking relationship. Design/methodology/approach Using qualitative methods, this study uses a case study approach, conducting in-depth interviews with relationship managers from major New Zealand banks. The data are analyzed using thematic analysis with a process- and mechanism-oriented lens. Findings The study identifies bank criteria for defining SMEs, considering factors such as business complexity, owner/manager ethnicity and business lending. Banks divide their activities into personal and business banking, with the latter further classified as micro-, small- and medium-sized businesses based on borrowing amounts. Three types of RB emerge, namely, micro-business (online/many-to-many) relationship model (RM), small-business RM (one-to-many) and medium-sized business (one-to-one) RM. This study presents a taxonomy of business banking relationship management models that capture the structure and dynamics of the three RB levels. Research limitations/implications Interviews may introduce biases or limited perspectives. Findings specific to New Zealand may not universally apply. Future research could explore different regions and assess the impact of these RB models on SMEs’ financial outcomes and satisfaction with banking services. Practical implications Findings assist banks in organizing activities and managing SME relationships. Taxonomy aids in categorizing companies and determining appropriate management models. Consequently, tailored services can be provided based on SME needs, offering customized financial packages. Social implications RB models prioritizing ethnicity consideration and personalized services contribute to enhanced financial inclusion for SMEs, thereby fostering broader socioeconomic growth and development, partly through the provision of tailored financial packages. Additionally, relationship managers specializing in specific industries can offer valuable insights and assistance to SMEs, fostering mutual trust and collaboration. Originality/value To the best of the author’s knowledge, this is the first study to hypothesize, investigate, identify and provide evidence for three RB levels in SMEs. The presented taxonomy contributes to the literature on the SME–bank relationship by providing a structured framework for effective SME relationship management. Insights can help banks develop strategies and practices for serving SMEs, ultimately contributing to their growth and success.

How do banks finance firm innovation: evidence from syndicated loans in China

ABSTRACT This study examines the relationship between syndicated loans and firm innovation in China with a detailed loan-firm-level dataset from Dealscan. The results revealed that the research and development investment for firms that obtained syndicated loans increased by 14.6% in the following fiscal year compared to those that did not. Such effects persist across various robustness checks. The promotion effect of syndicated loans on firm innovation works through two mechanisms: the signalling effect and the efficiency effect. Further analysis suggests that lender characteristics such as being large-scale, having foreign ownership, and having expertise in syndication could further strengthen the positive effect. Moreover, the impact of syndicated loans is more pronounced for financially constrained firms that lack banking relationships. Furthermore, we find that the expansion of syndicated lending within an industry is associated with a positive spillover effect, fostering innovation in non-recipient firms. Our findings highlight the critical role syndicated loans play in alleviating credit rationing problems and stimulating innovation.