Do Relationships Matter? Evidence from Loan Officer Turnover

Abstract

Using exogenous shocks to the relationship between borrowers and loan-officers, we document that borrowers are less likely to receive new loans from the bank and are more likely to apply for credit from other banks when their original loan officers are absent. They also are more likely to miss payments or go into default. These effects are more pronounced when turnovers are unexpected as in the case of sickness leaves or when officers do not have strong incentives to transfer information, e.g. terminated loan officers. However, when given the right situation, e.g. voluntary resignations of loan officers, it seems possible to transfer soft information between employees within the same institution.

Keywords: Banks, loan officers, relationship lending, organisational structure

JEL Classification: G20, G21, G30