Authors: Patrick Bolton, Xavier Freixas, Leonardo Gambacorta and Paolo Emilio Mistrulli

Review of Financial Studies, Vol. 29, No 10, 2643-2676, October, 2016

We study how relationship lending and transaction lending vary over the business cycle. We develop a model in which relationship banks gather information on their borrowers, allowing them to provide loans to profitable firms during a crisis. Because of the services they provide, operating costs of relationship banks are higher than those of transaction banks. Relationship banks charge a higher intermediation spread in normal times, but offer continuation lending at more favourable terms than transaction banks to profitable firms in a crisis. Using credit register information for Italian banks before and after the Lehman Brothers’ default, we test the theoretical predictions of the model.

This paper originally appeared as Barcelona GSE Working Paper 714