On the Importance of Prior Relationships in Bank Loans to Retail Customers

73 Pages Posted: 21 Nov 2011

See all articles by Manju Puri

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Jörg Rocholl

ESMT European School of Management and Technology

Sascha Steffen

Frankfurt School of Finance & Management

Multiple version iconThere are 2 versions of this paper

Date Written: October 26, 2011

Abstract

This paper analyzes the importance of retail consumers’ banking relationships for loan defaults using a unique, comprehensive dataset of over one million loans by savings banks in Germany. We find that loans of retail customers, who have a relationship with their savings bank prior to applying for a loan, default significantly less than customers with no prior relationship. We find relationships matter in different forms, scope, and depth. Importantly, though, even the simplest forms of relationships such as transaction accounts are economically meaningful in reducing defaults, even after controlling for other borrower characteristics as well as internal and external credit scores. Our results suggest that relationships of all kinds have inherent private information and are valuable in screening, in monitoring, and in reducing consumers’ incentives to default.

Keywords: retail banking, relationships, default rates, monitoring, screening

JEL Classification: G20, G21

Suggested Citation

Puri, Manju and Rocholl, Joerg and Steffen, Sascha, On the Importance of Prior Relationships in Bank Loans to Retail Customers (October 26, 2011). ECB Working Paper No. 1395. Available at SSRN: https://ssrn.com/abstract=1949786

Manju Puri (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
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NBER

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FDIC ( email )

550 17th Street NW
Washington, DC 20429
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Joerg Rocholl

ESMT European School of Management and Technology ( email )

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Berlin
Germany

HOME PAGE: http://www.esmt.org/en/159244

Sascha Steffen

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

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