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

Abstract

Using Y-14Q supervisory loan-level data, we investigate how relationship business borrowers fare relative to others in loan contract terms (spread, maturity, collateral) during times of need. The COVID-19 crisis facilitates analysis: it more directly impacted borrowers than banks, was plausibly exogenous to both, and provides a unique shock-and-recovery phenomenon for identification. We find worse terms (dark-side dominance) for most relationship borrowers early in the crisis which is reversed by better treatment during recovery. Additional analysis suggests the channel behind dark-side effects is banks imposing costs on less-bank-dependent relationship borrowers to protect the value of long-term relationships with more-bank-dependent relationship borrowers.

Keywords: Banks, bank loans, relationship lending, loan contract terms, financial crises, COVID-19, Paycheck Protection Program (PPP)

JEL Classification: G01, G21, G28