Karolis Liaudinskas, Universitat Pompeu Fabra (Job Market Seminar)
"Loss of a Lending Relationship: Pain or Relief"
We estimate firms’ hold-up costs and bank-switching costs using loan-level data and a novel identification setting – bank closures. We find that after a financially distressed bank closed and its good borrowers were forced to switch, their borrowing costs dropped steeply and converged to the market’s average. We document no such effect when a healthy bank closed. This suggests that distressed banks may use informational monopoly power to hold up and exploit their good borrowers. The drop of borrowing costs reflects firms’ ex-ante hold-up costs and the lower bound of switching costs. To policy-makers this suggests potential benefits of bank closures.
Contact person: Peter Norman Sørensen