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

Abstract

We investigate how relationship borrowers fare relative to others in loan contract terms (spread, collateral, maturity, amount) during times of need using the COVID-19 quasi-natural experiment. COVID-19 is superior for such analysis because it primarily affects borrowers rather than banks. Our Y-14Q loan-level dataset has broader representation than other datasets. We find the dark side of relationships dominates across relationship measures, COVID-19 shocks, and PPP participation. Additional bank-level analysis suggests dark-side dominance for contract terms at the intensive margin is not offset by increased credit access at the extensive margin. Limited brightside findings hold for smaller firms and smaller banks.

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

JEL Classification: G01, G21, G28