Abstract: How do long-term relationships between banks and firms shape loan pricing and capital allocation? Using administrative data from Mexico’s credit registry, I provide stark evidence for an insurance view of relationship lending. When firms repeatedly borrow from the same bank, the pass-through of their default risk to loan rates is nearly zero, and past risk assessments persistently influence credit terms. In contrast, switching to a new bank results in full risk pass-through, consistent with competitive market predictions. I rationalize this evidence in a structural model where banks compete for borrowers by offering optimal long-term contracts. Switching costs sustain commitment to banking relationships, enabling insurance. The estimated model replicates the observed pricing patterns and generates new predictions on when firms receive cheap funding and when they are tempted to switch, which I validate in the data. At the macro level, switching costs enhance capital allocation by strengthening relationships, recovering over 10 percent of welfare losses from financial frictions. However, when embedded in a New Keynesian framework, relationships dampen monetary and fiscal policy pass-through, as banks optimally absorb part of these policy shocks.
Discussant: William Diamond, University of Pennsylvania
Matteo Benetton, University of California-Berkeley
Greg Buchak, Stanford University
Abstract: Small businesses in the US are frequently excluded from borrowing through traditional term loans or lines of credit and rely instead on highly standardized, high-interest rate business credit cards to meet their financing needs. Are rates high because this credit is costly to provide or because lenders charge high markups? We document that average credit card utilization is almost 30% and is higher for firms facing significant cashflow volatility. While the unconditional delinquency rate is low, it is strongly correlated with utilization, potentially making cards expensive to provide because borrowers make interest-generating draws when they are least able to repay. We develop and estimate a structural model of firms’ card demand, utilization, and default choice, accounting for imperfect competition and the correlation between utilization and default. We find that while the correlation between utilization and delinquency leads to modestly higher rates, they are primarily explained by markups rather than lender costs, making business card provision highly profitable. In counterfactual analyses we show that under systematic stress scenarios, absent large shocks to lender funding costs, lender profits tend to rise in times of borrower stress, as higher revenue from utilization more than offsets increases in delinquency. Finally, we evaluate proposed capital regulations that add a portion of undrawn credit limits to bank risk-weighted assets. Such rules reduce bank credit provision and push some lending outside the regulated banking sector, while modestly reducing firm surplus. Because credit card lending tends to be more profitable in times of stress, such regulations may be counterproductive for bank stability.
Discussant: Yilin (David) Yang, City University of Hong Kong
Abstract: I document that 96% of bank funding to nonbank lenders (NBLs) is via credit lines, while NBLs hold about 70% of corporate term loans. NBLs use credit lines to manage investment and liquidity shocks; banks, with their funding advantage, serve as natural insurers. I develop a macrofinance model calibrated to U.S. syndicated loan data to quantify the value of contingent liquidity. Banks weigh the benefits of “renting” NBL balance sheets via credit lines against the risks of higher limits and drawdowns. The model yields three main results: (1) demand-driven expansions in credit lines reallocate risk to banks but enhance stability by boosting asset prices and safe asset supply; (2) credit lines outperform cash and debt by providing flexibility and insurance, especially in crises; (3) banking policy non-monotonically spillovers to nonbank lending and off-balance sheet regulation shapes credit line supply and systemic resilience, with optimal policy balancing liquidity and risk.
Discussant: Nicola Cetorelli, Federal Reserve Bank of New York
