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Loss of a lending relationship: shock or relief?

Karolis Liaudinskas () and Kristina Grigaite ()
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Karolis Liaudinskas: Universitat Pompeu Fabra
Kristina Grigaite: Bank of Lithuania

No 64, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: 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 exogenously 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. Apparently, closures of such banks can release the best-quality firms from the hold-up and allow borrowing cheaper elsewhere.

Keywords: relationship lending; hold-up; asymmetric information; bank closures; financial distress; switching costs (search for similar items in EconPapers)
JEL-codes: D82 E51 G20 G21 G30 G33 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-mac
Date: 2019-07-10
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