Bank Heterogeneity and Interest Rate Setting: What Lessons Have We Learned Since Lehman Brothers?

41 Pages Posted: 1 Dec 2011

See all articles by Leonardo Gambacorta

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Paolo Emilio Mistrulli

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2011

Abstract

A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank-specific characteristics affect the functioning of the credit market in an economy-wide crisis, when banks may find it difficult to perform the role of shock absorbers. We investigate how bank-specific characteristics (size, liquidity, capitalization, funding structure) and the bank-firm relationship have influenced interest rate setting since the collapse of Lehman Brothers. Unlike the existing literature, which has focused chiefly on the amount of credit granted during the crisis, we look at its cost. The data on a large sample of loans from Italian banks to non-financial firms suggest that close lending relationships kept firms more insulated from the financial crisis. Further, spreads increased by less for the customers of well-capitalized, liquid banks and those engaged mainly in traditional lending business.

Keywords: bank interest rate setting, lending relationship, bank lending channel, financial crisis

JEL Classification: G21, E44

Suggested Citation

Gambacorta, Leonardo and Mistrulli, Paolo Emilio, Bank Heterogeneity and Interest Rate Setting: What Lessons Have We Learned Since Lehman Brothers? (November 1, 2011). BIS Working Paper No. 359, Available at SSRN: https://ssrn.com/abstract=1961592

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Paolo Emilio Mistrulli

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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