The Value of Relationship Banking during Financial Crises : Evidence from the Republic of Korea
A systemic financial crisis with monetary restriction is probably the most promising occasion for assessing whether, and to what extent, relationship banking is valuable to borrowers. The authors take this question to a unique database of credit bu...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/02/1003148/value-relationship-banking-during-financial-crises-evidence-republic-korea-value-relationship-banking-during-financial-crises-evidence-republic-korea http://hdl.handle.net/10986/19710 |
| Summary: | A systemic financial crisis with
monetary restriction is probably the most promising occasion
for assessing whether, and to what extent, relationship
banking is valuable to borrowers. The authors take this
question to a unique database of credit bureau,
microeconomic information covering the pervasive financial
crisis the Republic of Korea experienced in 1997-98. The
database includes all corporate borrowers surveyed by the
Korean Credit Bureau, providing details on the structure of
their borrowings, and on their relationship with lending
banks. The authors did not have access to the identity of
the corporate borrower, and their only non-financial control
variable was the borrower's Standard Industrial
Classification (SIC). This restriction limited their
analysis to smaller borrowers, keeping their sample focused
on small, and medium-size enterprises, which were likely to
rely on banks for external financing. Their findings: 1)
Outstanding loans plunge more for firms with weaker
pre-crisis relationship banking. 2) The drop in credit lines
- arguably a proxy identifying shifts in the loan supply -
is larger for firms relying less on strong relationship
banking. 3) More intense pre-crisis relationship banking
reduces the probability that a previously non-delinquent
firm would build (increase) its loans in arrears in 1998,
the year of the sharpest liquidity constraints. 4) All
things equal, this probability depends on whether firms were
borrowing from one (or more) of the five banks foreclosed in
June 1998, showing that it might be particularly difficult
for borrowers to replace distressed lending banks during a
financial crisis. The authors' findings support the
hypothesis that relationship banking = with surviving banks
- has a positive value during a systemic financial crisis.
They argue that for many viable small, and medium-size
businesses in Korea, relationship banking reduced liquidity
constraints, and thus, diminished the probability of
unwarranted bankruptcy. |
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