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A Quantitative Analysis of Bank Lending Relationships


Abstract: We study the aggregate consequences of dynamic 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 5.9%. Relationships amplify the negative real effects of credit supply shocks, but mute those of negative credit demand shocks. In a financial crisis which destroys 25% of bank net worth, for example, loan volume drops more than twice as much in our baseline model than in a competitive analog with no relationships, but banks recapitalize faster.

JEL Classification: E44; G21;

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

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Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2025-03-06

Number: 2022-033

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