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The Time Has Come for Banks to Say Goodbye: New Evidence on Banks' Roles and Duration Effects in Relationship Terminations

Kiyotaka Nakashima () and Koji Takahashi ()

MPRA Paper from University Library of Munich, Germany

Abstract: Using a loan-level matched sample of Japanese banks and firms, we examine what factors determine the termination of the bank-firm relationship. We find that terminations are mainly driven by bank factors, but such bank-driven terminations increase when banks' capital conditions worsen. The constraints on bank capital in the Japanese banking crisis increased terminations, implying the presence of a capital crunch. Moreover, ``flight-to-quality" behavior prevailed instead of ``evergreening" in relationship terminations because of lowly capitalized banks' motives to reduce agency costs. We also find that a longer relationship duration decreased the probability of termination substantially when Japan's banking system was stable, but such duration effects weakened when the system was fragile. Japan's banking system cultivated bank-firm relationships over many decades to lower agency costs gradually, but this system malfunctioned partially in the flight to quality, whereby many banks could not afford to maintain relationships with distressed borrowers irrespective of duration.

Keywords: matched lender--borrower data; bank-firm relationship; capital crunch; evergreening; flight to quality; duration effect; long-term contract (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2018-10-02
New Economics Papers: this item is included in nep-ban
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