Combining Arm'S-Length and Control-Oriented Finance Evidence from Main Bank Relationships in Sweden

Abstract

The close and stable relationships between the large commercial banks and non-financial corporations in Sweden came under severe strain over the last decade. The financial system experienced wide-ranging financial deregulation and a rapid expansion of bank lending followed by a dramatic banking crisis and a severe contraction of credits. Using detailed, confidential, and internationally unique data on individual credit contracts, this paper documents the main bank relationships and their evolution during this period. The main findings are: (1) firms continue to rely on a single dominant bank lender throughout the period; (2) the turnover of main bank relationships increases dramatically; (3) the level of bank exposure in individual firms jumps as a result of both higher credit volumes and falling collateralization of credits; (4) many firms establish a second, underutilized, credit facility with another bank; (5) main banks have less collateral than these side banks; and (6) main banks have substantial ownership of equity in borrower firms through related institutions. The strong link between lending and such indirect equity ownership is perhaps the most striking aspect of the Swedish main bank arrangement, and equity holdings are important in sustaining these relationships.