Relationship Lending Technologies Research Articles

NOT ALL BANKS ARE EQUAL: COOPERATIVE BANKING AND INCOME INEQUALITY

This paper studies the role of different types of credit institutions in income inequality. By analyzing Italian local (provincial) credit markets over the 2001–2011 period, we find that cooperative banks mitigate income inequality in local communities more than their commercial counterparts. The results also suggest that it is the specific nature and orientation of cooperative banks, more than their relationship lending technologies, that improve income distribution. The impact of cooperative banking on inequality appears however to be partly channeled by a reduced dynamism of local economies, especially lower migratory flows and business turnover. (JEL G21, G38, O15)

Banking relationships, firm-size heterogeneity and access to credit: Evidence from European firms

Using detailed data on European manufacturing firms, this paper investigates the role of firm-bank relationships and lending technologies in firms’ access to credit during the 2007–2009 financial crisis. Empirical results show that firms’ credit availability improves when banking relationships are tighter and when banks adopt a relationship lending approach. The association between banking relationship characteristics and credit access is characterized by significant heterogeneity across firm size groups. Specifically, we find that relationship lending technologies, the recourse to multiple banking and a consolidated relationship with the main bank are particularly beneficial for the access to credit of informationally opaque small businesses.

Impact of Banking Competition on the Use of Soft Information

Over the past 20 years, scholars have discussed the impact of banking competition on the choice between transactional and relationship lending technologies extensively, but no resolution has emerged. To address these questions, this article uses a new measure of relationship lending that accounts for the actual level of soft information that banks use in their loan pricing. With this new measure, the analysis reveals that banks prefer to implement relationship lending technology when competition is weak. In addition and in accordance with extant theoretical conclusions, the shape of the relationship between competition and relationship banking is nonlinear and concave.

Lending technologies, banking relationships, and firms’ access to credit in Italy: the role of firm size

ABSTRACTThis paper analyses the role of lending technologies and banking relationships on firms’ credit access in Italy. Using EFIGE firm-level data, we show that the depth and strength of firm–bank relationships have heterogeneous effects on credit demand and rationing probabilities depending on the size of the borrower. Multiple banking relationships alleviate financial constraints for small firms, while borrowing from a large number of lenders hinders access to credit for large companies. Small and medium-sized enterprises with a higher share of debt with the main bank have a lower probability of being credit denied, as debt concentration contributes to overcome the opacity problems typical of the SMEs. Long-lasting relationships, by reducing information asymmetries, significantly improve access to credit for small and large firms. Conversely, we find that medium-sized enterprises are more exposed to financing constraints as relationship duration increases, due to possible lock-in effects. Finally, firms maintaining banking relationships based on transactional technologies are more likely to be credit denied, while the use of relationship lending technologies improves credit availability for both small and large enterprises.

Credit Relationships in the great trade collapse. Micro evidence from Europe

Abstract Using a rich sample of small and medium-sized European manufacturers, we investigate the nexus between banks’ relationship lending technologies and firms’ export activities during the 2009 great trade collapse. We find that the contraction of firms’ export was milder when banks had access to up-to-date “soft” information on firms’ export prospects. However, we find no evidence of an association between the resilience of firms’ export and banks’ experience on firms’ past activities. The nexus between export resilience and banks’ access to soft information is especially tight for young and small exporters and for firms at an early stage of internationalization.

Can Relationship Lending Substitute for a Weak Legal Environment?

Do creditor rights influence the use of relationship lending? With data from EFIGE, gathered during a 2010 survey spanning seven European countries, this article addresses this question. First, it determines that banks and firms are more willing to implement relationship lending technology in weak legal environments. Second, to explain these results, the authors demonstrate that relationship lending technology can complement poor creditor rights and, by doing so, assure contract completion between creditors and debtors. These results are robust across several tests

Hierarchy of bank loan approval and loan performance

This paper analyzes data from a regional Italian bank to provide new evidence on the relationship between who, within a bank, approves a loan and the subsequent performance of the loan. The size of the bank and its pool of clients, who are primarily small- and medium-size firms, comprises characteristics of both relationship-based and transaction-based lending technologies. Our key finding is that the probability of loan default increases as the loan approval decision is made at higher levels of the lending-decision hierarchy. This evidence supports the primacy of relationship-lending technology relative to transaction-based lending technology.

Lending Technologies, Banking Relationships, and Firms’ Access to Credit in Italy: The Role of Firm Size

This paper analyses the role of lending technologies and banking relationships on firms’ credit access in Italy. Using EFIGE firm-level data, we show that the depth and strength of firm-bank relationships have heterogeneous effects on credit demand and rationing probabilities depending on the size of the borrower. Multiple banking relationships alleviate financial constraints for small firms, while borrowing from a large number of lenders hinders access to credit for large companies. Small and medium firms with a higher share of debt with the main bank have a lower probability of being credit denied, as debt concentration contribute to overcome opacity problems typical of SMEs. Long-lasting relationships, by reducing information asymmetries, significantly improves access to credit for small and large firms. Conversely, we find that medium-sized enterprises are more exposed to financing constraints as relationship duration increases, due to possible lock-in effects. Finally, firms maintaining banking relationships based on transactional technologies are more likely to be credit denied, while the use of relationship lending technologies improves credit availability for both small and large enterprises.

Borrowing Challenges for Minorities: How Lending Technologies Affect Discrimination in the SME Credit Market

Can relationship-lending technology be used to overcome discrimination, as the Allport’s (1954) contact hypothesis suggests? Or should minorities stay away from the bank? Using a sample of SMEs from the Survey of Small Business Finances 2003, this article shows that though relationship-lending technology generally reduces the spread and probability of the need to provide collateral for a loan, use of such technology actually leads to greater discrimination against minorities. Asians are the most negatively affected by this effect, followed by Afro-Americans and Hispanics. However, this effect occurs only when the length of the relationship is short; it tends to disappear when relationships are longer. With regard to the area in which a firm is located, there is less discrimination in areas with high minority population rates than in areas with low minority population rates. These results are robust with regard to the self-selection problem.

Impact of Banking Competition on Lending Technologies

For the past 20 years, scholars have extensively discussed the impact of banking competition on the choice between transactional and relationship lending technologies, both empirically and theoretically, but have not yet come to a resolution. This study addresses this question using a new approach to relationship lending: a measure of the actual level of soft information banks use at the time of loan pricing. Using this new approach, the authors conclude that banks prefer to implement relationship lending technology when competition is weak. In addition, with regard to the shape of the relationship between competition and relationship banking, they find that, in accordance with extant theoretical conclusions, this relationship is nonlinear and concave.

SME financing and the choice of lending technology in Italy: Complementarity or substitutability?

This paper investigates SME financing in Italy. The literature distinguishes between two main different lending technologies (LTs) for SMEs: transactional and relationship LTs. We find that banks lend to SMEs by using both LTs together, independently of the size and proximity of borrowers. Moreover, we show that the use of soft information decreases the probability of firms being credit rationed. Finally, we find that more soft information is produced when the bank uses relationship LT as primary technology individually or coupled with transactional LT. Our results support the view that LTs can be complementary, but reject the hypothesis that substitutability among LTs is somehow possible for outsiders by means of hardening of soft information.

SME Financing and the Choice of Lending Technology in Italy: Complementarity or Substitutability?

This paper investigates SME financing in Italy. The literature distinguishes between two main different lending technologies (LTs) for SMEs: transactional and relationship LTs. We find that banks lend to SMEs by using both LTs together, independently of the size and proximity of borrowers. Moreover, we show that when soft information is taken into account in transactional (relationship) lending it increases (decreases) the probability of firms being credit rationed. These results support the view that LTs can be complementary, but reject the hypothesis that substitutability among LTs is somehow possible for outsiders by means of hardening of soft information.

Bank Structure, Relationship Lending and Small Firm Access to Finance: A Cross-Country Investigation

Loans to small firms are associated with relationship lending technologies that may be better supported by smaller banks. Whether competition helps or hinders small firm access to finance may depend on the size distribution of banks and the ways in which banks compete. Using cross-country data from surveys of firms and banks and a measure of contestability evidence is produced for a non-linear relationship between competition and the use of bank financing by small firms. While at very low levels of contestability an increase in contestability increases small firm use of bank finance, for most observations of contestability in the sample, an increase in contestability produces the opposite result. This also holds for medium size firms outside of manufacturing. Medium size firms in manufacturing exhibit a non-linear relationship between competition and use of bank credit, but in an opposing direction. Small firms are also more likely to use bank financing the higher is the small bank market share. However, neither the size distribution of banks nor the level of profitability of lending is shown to further influence the effect of contestability on small firm use of bank lending.

Nonbank financing and performance of informationally opaque businesses

Previous studies argue that banks offer loans to informationally opaque businesses using relationship lending technology. Using survey data of small businesses in Japan, we show that informationally opaque and financially weak firms that do not have lending relationships use high interest rate nonbank loans because of low availability of bank credit. Furthermore, we show that nonbank loan applicants are likely to incur operating losses and default. These results imply that nonbanks have difficulty avoiding the information problem because borrowers have uninformative financial statements and weak financial conditions.

Development of Small and Medium Scale Enterprise in Bangladesh: Prospects and Constraints

The Small and Medium scale Enterprise (SME) working as the engines of economic growth. Promotion of SME especially in the developing countries like Bangladesh include their relatively high labor intensity, dependence on indigenous skills and technology, contributions to entrepreneurship development and innovativeness and growth of industrial linkages. The growing economic significance of the SMEs as sources of new business creation and employment generation. Bangladesh followed a development strategy in which private investment was controlled through a host of regulations involving investment sanctioning, credit disbursement, import licensing, foreign exchange allocation, etc. While these regulatory barriers dissatisfied private investment in general, the impact fell unevenly on SMEs. This was because of the relative inability of the SMEs to cope with the regulations compared to their large-scale counterparts. Today there is a widespread perception that most of the laws under which the small and medium scale institutions are operating seem to have fallen short in dealing with their institutional and operational aspects. The lending institutions should be encouraged to emphasize on the relationship lending technologies, which is based on “soft” information. The soft information may include the character and reliability of the SME’s owner based on direct contact over time by the institution’s loan officer; the payment and receipt history of the SME gathered from the past provision of loans, deposits, or other services to the SME by the institution; or the future prospects of the SME garnered from past communications with SME’s suppliers, customers, or neighboring businesses. Banking norms and attitudes towards SME financing should be changed as because small enterprises differ considerably from the traditional clientele and do not conform to the norms detailed in the manual of banking norms and procedures.

Distance, Lending Technologies and Interest Rates

We investigate how the distance between banks and firms affect loan interest rates. To this aim, we use detailed information on more than 370,000 bank loans granted to firms by more than 120 Italian banking institutions (stand-alone banks and banking groups). We find that loan interest rates correlate negatively with the distance between the bank headquarters and the borrower and that the effect of distance on interest rates is lower for large banks compared to small intermediaries. This result buttresses the hypothesis that those banks whose headquarters are close to firms (local banks) are in a better position to establish close relationships with borrowers, consequently gaining an informational advantage over competitors. Thus, local banks certify the quality of borrowers and therefore charge a certification premium over loan interest rates. The analysis also suggests that a certain degree of specialization among banks may improve the efficiency of the banking system as a whole, with local banks engaging in relationship lending technology and other banks focusing on transaction lending technologies.

Relationship Lending, Accounting Disclosure, and Credit Availability during the Asian Financial Crisis

We examine whether lending relationships benefit firms by making credit more available during periods of financial stress. Our main finding is that during the Asian financial crisis of July 1997 through the end of 1998, relationship lending increased the likelihood that Korean and Thai firms would obtain credit but it had no effect on Indonesian and Philippine firms. We ask if accounting disclosure might explain the observed differences among the three countries for which audit information is available. We find that for Indonesian firms with weak lending relationships, banks replace relationship lending technology with a financial‐statement lending technology. Such a result does not hold for Korean and Philippine firms.