Browsing by Subject "Relationship lending"

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Essays in relationship banking : the efficiency of savings-linked relationship lending and credit information sharing
(2017) Kirsch, Steffen; Burghof, Hans-Peter
The first part of my thesis concerns credit information production of lenders. In a multi-period partial equilibrium model of lending to private households I compare arm’s-length lending with relationship lending that is based on information production about borrowers in preceding saving relationships. These are often the only source of private information that lenders possess about loan demanding households. The model shows that savings-linked relationship lending leads to a Pareto improvement or an increasing allocative efficiency of the financing market compared to arm’s-length lending in markets of low time preference or low average borrower quality. In these markets, savings-linked relationship lending can overcome financing market failure due to adverse selection, especially for financing volumes that are large in comparison to households’ periodic savings or incomes. Thus, the model shows that savings-linked relationship lending is particularly well suited and economically beneficial for housing finance of private households and is able to increase home ownership rates. Competitive savings-linked relationship lending, as derived in the model, shares major characteristics with contractual saving for housing which is a widespread and important product of housing finance in Continental Europe. My model therefore provides, to my knowledge, the first theoretical relationship lending explanation for contractual saving for housing. Further, my results add a novel economic explanation for synergies between the two main activities of traditional commercial banking, deposit-taking and lending. The second part of my thesis concerns credit information sharing between lenders. Credit information sharing between lenders can have a disciplinary effect on borrowers because defaulting with one lender ruins the reputation with every other lender (Vercammen, 1995; Padilla and Pagano, 2000). This reputation effect, however, diminishes and finally disappears the more comprehensive credit registries become. I show in a multi-period model of repeated lending that credit information sharing can induce borrower discipline beyond “passive” reputation effects if banks apply classical disciplining, that is, if failure to pay inevitably provokes consequences. I find that such disciplining can Pareto improve the efficiency of the financing market and reduce defaults by overcoming market failure and mitigating underinvestment in projects and in effort, even for comprehensive and unrestricted credit information sharing. I further show that disciplining borrowers by pro rata rationing credit after default is more promising than tightening credit rates. Hence, my model provides a rare case of efficient equilibrium credit rationing: disciplining by credit rationing enhances the efficiency of the market while constituting aggregate equilibrium credit rationing in the sense of Stiglitz and Weiss (1981). Contrary to the previous literature that suggests to restrict and randomize credit reporting in order to prevent diminishing reputation effects, the policy implications following from my work are, first, to rather restrict access to credit registries than their content and, second, to enhance transparency of information sharing.