Big Broad Banks: How Does Cross-Selling Affect Lending?

Abstract

This paper investigates how cross-selling affects relationship lending with internal data of a large bank and the Swedish credit registry. I show that within a bank-firm relationship, profit earned from non-loan products cross-subsidizes loans and increases 1) credit supply and 2) lenience in delinquency. For identification, I exploit the Basel II-induced exogenous variation in products' profitability while holding constant the firms' creditworthiness and relationship informativeness. I find that the average affected firms experienced a decrease of 6.1% ($400,000) in credit supply and 24% (9.9 pp) in lenience in delinquency. The results inform optimal regulatory design for lenders who multi-produce.

Keywords: cross-subsidization, relationship banking, cross-selling, credit allocation, debt renegotiation

JEL Classification: G20, G21, G28