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Does your neighbour know you better? The supportive role of local banks in the financial crisis
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Barboni, Giorgia and Rossi, Carlotta (2019) Does your neighbour know you better? The supportive role of local banks in the financial crisis. Journal of Banking & Finance, 106 . 514 -526. doi:10.1016/j.jbankfin.2019.05.007 ISSN 0378-4266.
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Official URL: https://doi.org/10.1016/j.jbankfin.2019.05.007
Abstract
Relationship lending allows local banks to collect private information about their customers and to mitigate information asymmetries that often lead to credit rationing. In this paper, we argue that soft information collected through relationship lending favors lending decisions even when borrowers’ quality is poor from a “hard-information” perspective. We compare the behaviour of local versus non-local banks using data immediately before and after the 2007–08 Financial Crisis. We exploit the heterogeneity in banks’ reliance on soft information to study how their lending strategies changed when firms’ hard-information indicators deteriorated after the outbreak of the financial crisis. Our paper shows that firms predominantly funded by local banks reported lower credit rationing immediately after the outbreak of the 2007–08 Financial Crisis. In the same period local banks were also less likely to terminate existing relationships with their customers, suggesting that they continued funding their clients even when borrowers’ balance sheet variables worsened. We rule out alternative hypotheses explaining our results, such as demand effects, “zombie-lending” behaviour, or different impacts the financial crisis had on the credit supply of local versus local firms. This leads us to conclude that thanks to their greater reliance on soft information, local lenders supported their customers to a higher extent during bad times, at least in the period following immediately the outbreak of the Financial Crisis.
| Item Type: | Journal Article | ||||||||
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| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
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| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Library of Congress Subject Headings (LCSH): | Community banks , Financial crises , Credit, Loans | ||||||||
| Journal or Publication Title: | Journal of Banking & Finance | ||||||||
| Publisher: | Elsevier Science BV | ||||||||
| ISSN: | 0378-4266 | ||||||||
| Official Date: | September 2019 | ||||||||
| Dates: |
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| Volume: | 106 | ||||||||
| Page Range: | 514 -526 | ||||||||
| DOI: | 10.1016/j.jbankfin.2019.05.007 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||||
| Date of first compliant deposit: | 12 August 2019 | ||||||||
| Date of first compliant Open Access: | 9 November 2020 |
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