Benefits of Relationship Banking: Evidence from Consumer Credit Markets

50 Pages Posted: 19 Mar 2009 Last revised: 19 Sep 2017

Sumit Agarwal

National University of Singapore

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Chunlin Liu

University of Nevada, Reno - College of Business

Changcheng Song

National University of Singapore (NUS)

Nicholas S. Souleles

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: September 1, 2017

Abstract

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.

Keywords: Relationship Banking, Credit Cards, Consumer Credit, Deposits, Investments, Household Finance

JEL Classification: G21, D14

Suggested Citation

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

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Chunlin Liu

University of Nevada, Reno - College of Business ( email )

University of Nevada, Reno
Reno, NV 89557-0016
United States

Changcheng Song

National University of Singapore (NUS) ( email )

1 Arts Link, AS2 05-37
Singapore, 117568
Singapore
+6565166018 (Phone)

HOME PAGE: http://https://sites.google.com/site/songchch02/

Nicholas S. Souleles

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-9466 (Phone)
215-898-6200 (Fax)

HOME PAGE: http://finance.wharton.upenn.edu/~souleles

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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