Is a Friend in Need a Friend Indeed? How Relationship Borrowers Fare during the COVID-19 Crisis

Abstract

We challenge existing relationship lending literature on how banks manage their relationship with borrowers during crises. We test theories of intertemporal smoothing using the economic crisis of COVID-19 when borrowers are in great need of relationship benefits, rather than in the Global Financial Crisis (GFC) and other banking crises when banks are in more difficulties. We find “No” – banks do not offer more favorable loan contract terms to their relationship borrower “friends” when these “friends” are “in need” – “friends” get worse terms than others. These and other results complement other COVID-19 lending studies by including direct measures of bank-borrower relationships.

Keywords: Banks, relationship lending, loan contract terms, financial crises, COVID-19

JEL Classification: G01, G21, G28