Relationship lending, hierarchical distance and credit tightening: Evidence from the financial crisis

This paper examines the firms' credit availability during the 2007-2009 financial crisis using a dataset of 5331 bank-firm relationships provided by borrowers' credit folders of three Italian banks. It aims to test whether a strong lender-borrower relationship can produce less credit rationing for borrowing firms even during a credit crunch period. The results show that exclusivity of the relationship can mitigate the firm credit rationing. We also verify the influence of lending organizational structure during crisis. A new measure of distance in lending technologies has been introduced: the hierarchical distance calculated as the distance between the branch that originates the loan and the location of the hierarchical level responsible for financing decision. Our findings document a negative impact of distance on credit availability, consistent with the idea that proximity facilitates the transmission of soft information.

► We test if a strong relationship can produce less credit rationing for firms. ► We introduce a new measure of distance in lending technologies. ► The exclusivity of the relationship can mitigate the firm credit rationing. ► We report a negative impact of distance on credit availability.