Seminar: Loss of a lending relationship: shock or relief?
On Tuesday November 5th 2019, Karolis Liaudinskas (UPF) will give a presentation titled: "Loss of a lending relationship: shock or relief?"
We use loan-level data and a novel identification setting – closures of banks – to study how forced break-ups of lending relationships affect firms’ borrowing costs. We find that after a financially distressed bank closed and its best borrowers were forced to switch, their borrowing costs dropped steeply and converged to the market’s average. We document no such effect when a healthy bank closed. This suggests that distressed banks can use informational monopoly power to hold up and exploit their best borrowers. Closures of such banks can release the best-quality firms from the hold-up and allow borrowing cheaper elsewhere.