A Quantitative Analysis of Bank Lending Relationships

RePEc Short ID: pfa225
ORCID iD: 0000-0002-3759-2172

Dempsey, Kyle; Faria-e-Castro, Miguel

doi:10.20955/wp.2022.033

Working Paper Revision

A Quantitative Analysis of Bank Lending Relationships

Abstract: We study the aggregate consequences of sticky lending relationships in a model of heterogeneous banks facing financial frictions. We estimate the model's loan demand system on administrative loan-level data: the market power implied by the estimated strength and persistence of relationships yields a long run reduction in credit of 4.1%. Relationships amplify the negative real effects of credit supply shocks, but mute those of negative credit demand shocks. In a financial crisis which wipes out 25% of bank net worth, for example, loan volume drops 36% more in our baseline model than in a competitive analog with no relationships, but banks recapitalize faster.

Keywords: banking; lending relationships; aggregate dynamics;

JEL Classification: E44; G21;

https://doi.org/10.20955/wp.2022.033