Relationship Banking Research Articles

Enduring lending relationships and european firms default

This paper investigates the link between close banking relationships and European manufacturing firms’ defaults. Based on binary outcomes (i.e., Logit, Probit, Complementary log-log) and discrete-time models, the empirical analysis reveals that enduring lending relationships present benefits in reducing firms’ temporary and permanent defaults. This evidence suggests that, in a framework of limited credit access that may compromise firms’ survival, relationship lending might represent an effective tool for overcoming asymmetric information problems, helping firms relax credit constraints, encouraging greater discipline in their managers, and preventing failure.

Bank competition and the design of syndicated loans

AbstractWe study the effect of bank competition on the design of syndicate loans. We find that competition in the lead lender's market plays a significant role in determining the terms of the syndicate loans. Specifically, higher concentration leads to higher yield spreads, larger issues, shorter maturities, greater contract intensity, and more collateral requirements, but with a greater likelihood of performance pricing. We also find the prior banking relationships, anti‐takeover provisions and whether the lead bank is a national, regional, or state bank influence the designs of these loans.

The number of bank relationships and bank lending to informationally opaque SMEs

This paper examines how the number of bank relationships affects bank lending to informationally opaque firms using a unique firm-level dataset of 996 small and medium-sized enterprises (SMEs). We find that an increase in the number of bank relationships can increase bank lending to informationally opaque SMEs. We also find that this increase is prominently observed in long-term loans. Furthermore, these loans can gradually increase with the number of bank relationships. These findings suggest that such a number can serve as a quality sign of informationally opaque SMEs and increase bank lending to them.

Banking Market Consolidation and Tax Planning Intermediation: Evidence from Client Firm Tax Haven Operations

ABSTRACT This study examines the effect of banking market consolidations via mergers and acquisitions (M&As) on the role of banks in intermediating corporate tax planning through offshore tax haven operations. We find that bank clients significantly increase their tax haven operations after their banks are merged with others. In addition, such an increase is greater when a commercial bank merges with an investment bank and when the clients have greater tax planning opportunities. We also employ network analyses to show that the propensity for a client to expand its operations into a new tax haven country increases significantly when its relationship bank enters into this country through an M&A. Collectively, our findings reveal that bank M&As enhance banks’ tax intermediation capability.

Demand trade-off between PLSs and markups in the presence of a conventional banking relationship: The case of Moroccan companies

Theoretical explanations based on information asymmetry constitute the dominant paradigm of the near disappearance of PLSs (profit and loss sharing). This assumption implicitly implies a hypothesis on the power of contractual choice exclusively monopolized by Islamic banks. The theoretical positioning in this study to explain the arbitrage between PLSs and markups is based on a lack of demand. In this sense, this paper attempts to verify the demand trade-off of Moroccan companies between PLSs and markups. A logistic regression was used to establish several findings. The evidence suggests that past banking relationships with conventional banks and debt maturity both favor the commercialization of markups. On the other hand, financial quality of firms has no direct impact on the choice between PLSs and markups. This assertion implies that it is incorrect to assume that sole entrepreneurs undertaking high-risk projects choose to be funded by PLSs. Combining that with the fact that companies that agree to be funded by PLSs agree to share profits, private information and decision-making power, it can be said that PLSs can have a good chance of thriving in Morocco if Islamic banks provide a favorable climate for their marketing.

A journey towards human-centric and AI-augmented marketing?

We are in the midst, or perhaps even the beginning, of transforming how banking relationships are being built and developed over time. At Handelsbanken, we took the first steps in digitisation in the 1960s. We were early to introduce Internet banking to customers in the 1990s and have, like the financial market at large, focused on digitalisation in recent decades. The activities that could previously only be done at a branch are becoming more and more accessible via digital channels, processes are being automated, yet there is still more to be done. This paper will demonstrate how a 150-year-old bank, which closed its marketing function in the 1970s and has essentially grown mainly through word of mouth, might approach using AI in marketing. In the discussion, the paper draws on previous experiences of introducing AI in other domains within the bank, performed by the Digitalisation and Innovation team in collaboration with other parts of the organisation. As always, the introduction of new technology, including in marketing and sales, starts with business principles, data, ethics, company purpose and values, rather than with the technology itself. It is still early days for the bank when it comes to AI in marketing, and until there is such a thing as attentive algorithms, humans will be very much involved in the process — especially if the aim is to continue being human-centric in our approach, where the outcome of an activity is beneficial for customers, the bank and society at large. And the meaning of ‘customer-centric’ needs to be defined as making the system work with the customer at the centre: cross-channel, relevant, timely and based on in-depth customer understanding. The paper will show that the rationale for closing the bank’s marketing function back in the 1970s might not be so different from the rationale to do things differently today.

U.S. REIT banking relationships and syndicated loan pricing

U.S. REIT banking relationships and syndicated loan pricing

Targeted Reserve Requirements for Macroeconomic Stabilization

We study the effectiveness of targeted reserve requirements (RR) as a policy tool for macroeconomic stabilization. Targeted RR adjustments were implemented in China during both the 2008-09 global financial crisis and the recent COVID-19 pandemic. We develop a model in which firms with idiosyncratic productivity can borrow from two types of banks---local or national---to finance working capital. National banks provide liquidity services, while local banks have superior monitoring technologies, such that both types coexist. Relationship banking is modeled in terms of a fixed cost of switching lenders, and banks choose to switch only under sufficiently large shocks. Reducing RR on local banks boosts leverage and aggregate output, whereas reducing RR on national banks has an ambiguous output effect. Following a large recessionary shock, a targeted RR policy that reduces RR for local banks relative to national banks can lower costs of switching lenders, stabilizing macroeconomic fluctuations. However, targeting RR in that manner also boosts local bank leverage, increasing risks of default and related liquidation losses. Our model's mechanism is supported by bank-level empirical evidence.

TRUST AND ECONOMIC SATISFACTION AS ANTECEDENTS, AND LOYALTY AS OUTCOME, OF SMALL BUSINESS CUSTOMERS’ COOPERATION AND COORDINATION IN BANKING RELATIONSHIPS

Business success is determined by the ability to establish stable relationships that result in the retention of loyal customers. Extant literature on business-to-business relationships highlights trust, satisfaction, cooperation, and coordination, regarded as important constructs comprising relationship quality (RQ), as key drivers for ensuring loyalty. However, the interaction between these RQ constructs remain unclear. This study accordingly investigates a framework where trust and economic satisfaction are antecedents of cooperation and coordination, which ultimately influence small business customers’ loyalty towards their banks. The sample comprised 269 small businesses operating in South Africa. The empirical findings of this study show that trust and economic satisfaction within banking relationships are significant predictors of cooperation and coordination, which in turn positively influences small business customers’ loyalty towards their banks. This study contributes to existing literature by incorporating a small business banking perspective investigating the interrelatedness of selected constructs on establishing stable relationship and customer loyalty.

Determinants of customer recovery in retail banking—lessons from a German banking case study

Due to the increased willingness of retail banking customers to switch and churn their banking relationships, a question arises: Is it possible to win back lost customers, and if so, is such a possibility even desirable after all economic factors have been considered? To answer these questions, this paper examines selected determinants for the recovery of terminated customer–bank relationships from the perspective of former customers. This study therefore evaluates for the first time, empirically and systematically with reference to a German Sparkasse as a case-study setting, whether lost customers have a sufficient general willingness to return (GWR) a retail banking relationship. From our results, a correlation is shown between the GWR a banking relationship and some specific determinants: seeking variety, attractiveness of alternatives and customer satisfaction with the former business relationship. In addition, we show that a customer’s GWR varies depending on the reason for churn and is surprisingly greater when the customer defected for reasons that lie within the scope of the customer himself. Despite the case-study character, however, our results provide relevant insights for other banks and, in particular, this applies to countries with a comparable banking system.

Exploring the Ripple Effect and Consequences of Correspondent Banking De-Risking on Global Financial Inclusion and Stability: Evidence from Europe

This study explored the ripple effect and consequences of correspondent banking de-risking on global financial inclusion and stability, with a specific focus on evidence from Europe. Driven primarily by increased compliance requirements and the need to mitigate risks associated with anti-money laundering and combating the financing of terrorism regulations, de-risking led to the termination of correspondent banking relationships with various countries and financial institutions. The research aimed to understand the implications of this phenomenon on financial integration, access to essential financial services, and the exacerbation of economic disparities among different regions and demographic groups in Europe. A descriptive research design approach was employed, mainly quantitative analysis of CBR data and regulatory changes. The findings demonstrated that de-risking had a significant negative impact on financial inclusion and stability, particularly for small and medium-sized enterprises, non-profit organizations, and marginalized communities. Moreover, the termination of CBRs disrupted the flow of remittances, trade finance, and development aid, and led to an increased reliance on less-regulated, informal channels, which in turn undermined the global AML/CFT regime and exacerbated financial crime and systemic risks. Based on these findings, the study recommended enhancing collaboration and coordination among regulatory authorities, financial institutions, and affected stakeholders to develop a harmonized regulatory framework across European countries, implement a risk-based approach, and establish a centralized information-sharing platform. Additionally, targeted capacity-building efforts, exploration of innovative financial solutions, and the development of financial inclusion strategies prioritizing the needs of the most vulnerable segments of the population were recommended to counteract the negative effects of de-risking and promote financial inclusion and stability in Europe. Keywords: Correspondent banking de-risking, financial inclusion, global financial stability, anti-money laundering, combating the financing of terrorism

Does brand attachment protect consumer–brand relationships after brand misconduct in retail banking?

PurposeThis research aims to examine the role of consumers' brand trust and attachment on advocacy intention before and after the occurrence of brand misconduct in retail banking. In addition, the influence of brand attachment on consumers' willingness to switch, advocate for and forgive brands is examined in a post-misconduct scenario.Design/methodology/approachData were collected through a self-administered online survey questionnaire. A total of 304 valid and usable responses from Australian participants were analysed using IBM SPSS 27.0.FindingsThe findings reveal that brand attachment mediates the positive relationship between trust and advocacy intention. Furthermore, brand attachment (1) dilutes consumers' switching intention and (2) strengthens their willingness to forgive the bank after misconduct.Practical implicationsResults suggest that retail banks should create strong brand attachments with their consumers. In addition to brand trust, brand attachment will generate greater advocacy intention among consumers. Moreover, practitioners in retail banking can leverage brand attachment to mitigate the negative impact of brand misconduct.Originality/valueTo the best of the authors' knowledge, this study is the first to examine the impact of brand attachment on the consumer–bank relationship within the context of brand misconduct. The study is also unique in its analysis of the mediating role of brand attachment between brand trust and advocacy. This research further adds to the current literature by suggesting that strong and positive customer connections to the brand facilitate communication and marketing efforts after brand misconduct and that these are effective in maintaining consumer-bank relationship.

Banking relationship and research spin-offs’ life cycle: The Italian experience

Research Spin-Offs (RSOs) are special firms created within universities or research institutes that require significant financial resources to transfer their innovative technologies to the market. This work studies an important driver of RSOs’ success, i.e. the local banking environment in which such firms operate. Empirical results highlight that the local development of the banking sector does not affect RSO performance at the time of incubation, when the main source of funding comes from public contributions. Conversely, there is a significant positive and growing influence of local banking relationships when the RSO enters the market and becomes independent of public resources. The findings suggest that governments and banking institutions should develop new financial instruments to support RSOs, especially during the early stages of their life cycle. RSOs should consider bank debt as a complementary source of funding that allows them to encounter the vital growth opportunities emerging during the incubation phase.

Information asymmetry and the balance of interests of banks, their customers and the economy

Subject. The article analyzes the imbalance of interests of banks and their clients in connection with information asymmetry. Objectives. The aims include improving the efficiency of the banking market of the Russian Federation to enhance its support to economic development, working out proposals to reduce the imbalance of interests of banks and their customers so that the latter achieve their goals, perfecting risk management in banks. Methods. The study draws on logical and systems approaches, general scientific methods of analysis and synthesis of empirical data, comparative analysis of theoretical approaches to consideration of problems. Results. The concentration of capital in a handful of banks in any country market does not promote competition development, customer service quality improvement, enhanced contribution of the banking system to the development of the economy through credit support. The findings can be used by the banking market participants, public authorities, research and educational organizations when considering options for the development of the banking industry. Conclusions. The relationship of banks and clients should be based on generation of revenues and profit through assisting customers to achieve their goals, rather than on simple sale of banking products. In this case, banks can receive maximum information for adequate assessment of risks related to the service. This approach is beneficial for both parties and is applicable for building relationships between individual banks with retail and corporate customers, and the banking system as a whole with the non-financial sector of the economy.

Nowhere else to go: Determinants of bank–firm relationship discontinuations after bank mergers

This paper investigates firm-bank relationship changes in the context of bank mergers. We find that firms are less likely to switch and more likely to drop their bank relationship after bank mergers. Importantly, in less competitive environments, measured by Lerner index and HHI, relationship drops are more likely. If mergers decrease competition, the existing consolidation wave in banking could thus induce increasingly harmful bank–firm relationship drops. Firms are also more likely to switch and less likely to drop their bank relationships if they are more creditworthy, measured by their z-score and available collateral.

The role of auditors and banks in the tax aggressiveness of private firms

This study examines the role of auditors and monitoring banks in the tax aggressiveness of private firms. We use a unique data set of private small and medium‐sized entities (SMEs) in Finland where book–tax alignment is high and the auditing of private firms (exceeding a low threshold) is mandatory. We add to the existing literature by investigating the auditing of small private firms and using more detailed measures for bank monitoring. Our results suggest a positive association between tax aggressiveness and audit quality, implying that auditors play a greater role in providing tax‐related planning services than restraining tax aggressiveness. Furthermore, bank monitoring is positively associated with tax aggressiveness. This is consistent with lending banks being more interested in cash savings than reducing tax aggressiveness. Finally, we find no evidence of a joint effect of auditing and bank relationships. These results will interest the owners and managers of private companies, tax authorities and banks and the accounting and auditing profession.

Samoa

After a three-year recession triggered by the COVID-19 pandemic, the economy is recovering, boosted by the reopening of tourism. However, higher global commodity prices briefly raised inflation to double-digit rates. Disciplined fiscal policies, buoyant revenue and remittances, and donor support have contributed to fiscal and external stability. The banking system has remained resilient to the economic downturn, although there has been some deterioration in asset quality. Pressures on correspondent banking relationships continue. With the pandemic-driven decline in investment, as well as rising numbers of seasonal workers abroad, output is projected to remain well below pre-pandemic trends.

Interim Finance in Creditor-Oriented Bankruptcy Codes: A Study in the Context of Insolvency & Bankruptcy Code, India

This study examines interim financing with specific reference to the Insolvency and Bankruptcy Code, 2016 (IBC) in India. Interim financing is recognized as relevant to the successful outcome of the bankruptcy process. Internationally, bankruptcy regimes are considered robust if they contain enabling provisions allowing interim financing. IBC, hailed as creditor-friendly legislation, authorizes the insolvency professional (IP) to raise interim finance during bankruptcy. However, despite enabling legislation, the segment remains challenging. This study, through a qualitative methodology, examines the issues of mobilizing interim finance under the IBC. First, through a theoretical lens, this article discusses the importance of recognizing the distinct dimensions of interim financing under creditor-oriented regimes, like IBC, relative to the more established debtor-in-possession (DIP) financing model in the US (a debtor-friendly bankruptcy regime). This article argues that interim financing under creditor-oriented bankruptcy regimes faces certain inherent limitations (like lower lender motivation due to a lack of relationship banking or control/governance opportunities) relative to DIP financing, which primarily stems from who controls the firm during bankruptcy (IP or the corporate debtor). Through an interview method, this article then examines some specific issues in raising interim finance under the IBC. This research finds a lack of repayment visibility (quantum & timelines), narrow perception of interim finance and subtle differences between the objectives of the IP and lenders (resolution vs. recovery) are some practical impediments. From a normative perspective, this article suggests that improvements in IBC efficiency would improve takeout visibility to lenders. Greater stakeholder engagement will help alleviate conflicts and broaden the perspectives on the ultimate objectives of interim finance. Additionally, this article suggests learnings from the DIP model include a more early (ex-ante) consideration of interim finance (including potential sources). This article also calls for regulatory clarification on the inclusion of funding from the CoC in the technical definition of interim finance.

Bank Relationships and the Geography of PPP Lending

I study how bank relationships affected the timing and geographic distribution of Paycheck Protection Program (PPP) lending. Half of banks' PPP loans went to borrowers within 2 miles of a branch, mostly driven by relationship lending. Firms near less active lenders shifted to fintechs and other distant lenders, resulting in delays receiving credit but only slightly lower loan volumes. I estimate a structural model to fit the observed relationship between branch distance, bank PPP activity, and origination timing. I find that banks served relationship borrowers 5 to 9 days before other borrowers, an effect in line with reduced-form estimates using a sample of PPP borrowers with previous SBA lending relationships.

Villa CEREPEC-Chiguayante. Cooperativism and collective housing in Greater Concepción

The Metropolitan Area of Concepción (AMC) has industrial traces in its urban development. Under the auspices of state industries and their workers, housing complexes were developed in the second half of the twentieth century, away from industrial plants, proposing new modes of urban development for the period and location. A case in question is the Cooperativa de Empleados Refinería de Petróleo Concepción (Concepcion Petrol Refinery Employees Cooperative or CEREPEC), in Chiguayante. This article records part of the urban evolution of this commune, through the analysis of a housing complex materialized by workers of the National Petroleum Company (ENAP) under the cooperative model. The results show both the foundational contribution in building the urban space of "Manantiales street", as well as the way cooperativism materialized in the urban design and the architectural project of the CEREPEC complex. The company-worker-savings bank relationship stands out, where the worker assumes the leadership and the company supports its management, in a model that is very distant from industrial paternalism, and which logically builds different new sectors in the city. It is a relevant model because participatory processes are in demand today, involving the dynamics of construction and transformation of houses and neighborhoods.