Relationship and Transaction Lending in a Crisis

• Authors: Xavier Freixas.
• BSE Working Paper: 110199 | September 15
• Keywords: relationship banking , transaction banking , crisis
• JEL codes: E44, G21
• relationship banking
• transaction banking
• crisis

We study how relationship lending and transaction lending vary over the business cycle. We develop a model in which relationship-banks gather information on their borrowers, which allows them to provide loans to profitable firms during a crisis. Due to the services they provide, operating costs of relationship-banks are higher than those of transaction-banks. Relationship-banks charge a higher intermediation spread in normal times, but offer continuation-lending at more favourable terms than transaction banks to profitable firms in a crisis. Using credit register information for Italian banks before and after the Lehman Brothers’ default, we test the theoretical predictions of the model.