Relationship Lending: Evidence from the Consumer Credit Market

This paper empirically examines the benefits of relationship banking to banks, in the context of consumer credit markets. Using a unique panel dataset that contains comprehensive information about the relationships between a large bank and its credit card customers, we estimate the effects of relationship banking on the customers’ default, attrition, and utilization behavior. We find that relationship accounts exhibit lower probabilities of default and attrition, and have higher utilization rates, compared to non-relationship accounts, ceteris paribus. Such effects become more pronounced with increases in various measures of the strength of the relationships, such as relationship breadth, depth, and length. Moreover, dynamic information about changes in the behavior of a customer’s other accounts at the bank, such as changes in checking and savings balances, helps predict and thus monitor the behavior of the credit card account over time. To investigate the mechanisms, we show that the observed results are not due to selection or higher perceived default costs. Our results are consistent with monitoring explanation: the information that the lender has at its disposal on the dynamics of the relationship borrower's other accounts can be used in some way to mitigate credit risk on the credit card account. These results imply significant potential benefits of relationship banking to banks in the retail credit market.

Agarwal, Sumit and Chomsisengphet, Souphala and Liu, Chunlin and Song, Changcheng and Souleles, Nicholas S., Benefits of Relationship Banking: Evidence from Consumer Credit Markets (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=1365087 or http://dx.doi.org/10.2139/ssrn.1365087