Bank Heterogeneity and Interest Rate Setting: What Lessons Have We Learned since Lehman Brothers?

A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank-specific characteristics affect the functioning of the credit market in an economy-wide crisis. We investigate how...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2014-06, Vol.46 (4), p.753-778
Main Authors: GAMBACORTA, LEONARDO, MISTRULLI, PAOLO EMILIO
Format: Article
Language:English
Subjects:
Bank capital
Bank credit
bank interest rate setting
bank lending channel
Bank liquidity
Bank loans
Bank markets
Banking
Banking crises
Banks
Bond markets
Borrowing
Capital
Credit market
E44
Economic crises
Economic crisis
Financial crisis
G21
Interest rates
lending relationship
Liquidity
Loans
Rate setting
Studies
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Summary:A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank-specific characteristics affect the functioning of the credit market in an economy-wide crisis. We investigate how bank and bank-firm relationship characteristics have influenced interest rate setting since the collapse of Lehman Brothers. We find that interest rate spreads increased by less for those borrowers having closer lending relationships. Furthermore, firms borrowing from banks endowed with large capital and liquidity buffers and from banks engaged mainly in traditional lending were kept more insulated from the financial crisis.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12124