The Time Has Come for Banks to Say Goodbye: New Evidence on Bank Roles and Duration Effects in Relationship Terminations

Abstract

Examining a loan-level matched sample of Japanese banks and firms, we study the factors determining the termination of bank-firm relationships. We find that such terminations are mainly driven by bank factors, and that these bank-driven terminations increase when the banks' capital conditions become worse. Furthermore, a longer duration relationship decreased the probability of termination substantially when the Japanese banking system was stable, but the duration effects weakened when the system became fragile.

Keywords: matched lender-borrower data, bank-firm relationship, capital crunch, evergreening, flight to quality, duration effect, long-term contract

JEL Classification: G01, G21, G28