Unconventional Monetary Policy and Bank Lending Relationships

Abstract

How to support private lending to firms during aggregate contractions is an open question of major policy importance. This paper exploits an unexpected drop in the cost of funding bank loans to some firms but not others in France in 2012 to uncover how banks adjust their firm lending portfolios in a crisis. The cost reduction causes eligible firms' bank debt to rise, and reduces defaults on their suppliers and downgrades of their credit ratings, providing causal evidence that targeted unconventional monetary policy can be an effective policy lever to increase private credit and reduce contagion of financial distress. The effect is almost entirely driven by firms with only a single bank relationship — a numerous and understudied group — and the positive loan supply shock we examine is transmitted to firms through banking relationships. We find that, for high quality firms only, banking relationships ensure continued lending during a credit crunch. We also provide suggestive evidence that single-bank firms were substantially more credit constrained than multi-bank firms.

Keywords: Relationship banking, SME finance, Unconventional Monetary Policy, Bank lending

JEL Classification: E52, G01, G21, G28, L14