Identifying relationship lending in the interbank market: A network approach

TL;DR

This paper introduces statistical tests to identify significant lending relationships in interbank networks, revealing stable relationship lending fractions and higher interest rates during financial distress.

Contribution

It proposes a novel statistical approach to quantify relationship lending, addressing limitations of previous simple proxy measures.

Findings

Stable fraction of relationship lending over time

Relationship lenders charge higher interest rates during distress

Method applied successfully to Italian interbank networks

Abstract

Relationship lending is broadly interpreted as a strong partnership between a lender and a borrower. Nevertheless, we still lack consensus regarding how to quantify the strength of a lending relationship, while simple statistics such as the frequency and volume of loans have been used as proxies in previous studies. Here, we propose statistical tests to identify relationship lending as a significant tie between banks. Application of the proposed method to the Italian interbank networks reveals that the fraction of relationship lending among all bilateral trades has been quite stable and that the relationship lenders tend to impose high interest rates at the time of financial distress.