Lending relationships and the collateral channel

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 16 November 2018

Staff Working Paper No. 768

By Gareth Anderson, Saleem Bahaj, Matthieu Chavaz, Angus Foulis and Gabor Pinter

This paper shows that lending relationships insulate corporate investment from fluctuations in collateral values. We construct a novel database covering the banking relationships of private and public UK firms and their individual directors. The sensitivity of corporate investment to changes in real estate collateral values is halved when the relationship between a bank and a firm or its board of directors increases by 11 years. The importance of long bank-firm relationships diminishes when directors have personal mortgage relationships with their firm’s lender. Our findings support theories where collateral and private information are substitutes in mitigating credit frictions over the cycle.

PDFLending relationships and the collateral channel

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