The 2008-2009 financial crisis prompted economists and regulators to scrutinize the factors that impact firms’ access to financial resources. Small and medium-sized enterprises in particular depend on bank loans, but shocks to the banking system can trigger a credit crunch. In fact, during the crisis, interest rate spreads on loans to SMEs increased to partially offset expansionary monetary policy. This was the setting for our research, in which we focus on factors that allow SMEs to access credit at reasonable prices. We pay special attention to the informational privilege that banks can gain through contact with their borrowers.
Thanks to “relationship lending,” which is grounded in the duration, exclusivity, and intensity of the bank-firm relationship, businesses may be able to borrow at lower interest rates. To delve deeper into this idea, our study integrates extant literature using more detailed metrics to measure the strength of borrower-lender relationships while factoring in a wide range of variables. These include the number of face-to-face (f2f) contacts between the bank and the firm during a given year and where these contacts occur.
We opted to focus on data from Italy for several reasons. To name two, first companies in this country are highly dependent on bank loans, which makes them vulnerable to any distortion in the credit market. Second, multiple lending is a long-standing tradition among Italian firms, which makes them particularly interesting to study in the context of relationship lending.
An additional aim of our research is to shed light on the hold-up problem, which is seen as one of the main negative effects of a close bank-firm relationship. Hold-up refers to the bank, thanks to its bargaining power, imposing unfavorable loan conditions after the borrower has already made specific investments to finalize the transaction.