“Out of Sight, Out of Mind?” Banks’ Private Information, Distance, and Relationship Length

Abstract

What is in banks’ private information about borrowers, and how does it relate to physical distance and relationship length? Exploiting the Federal Reserve’s comprehensive supervisory loan-level dataset on corporate borrowers, we distinguish two dimensions of private information embedded in internal credit ratings: incongruity, bank’s assessment of firm risk relative to one based on observables, and unfavorability, a worse assessment. Incongruity increases in distance and bank-firm relationship length but decreases for distanced firms as length increases. Unfavorability increases in distance and decreases in relationship length and the interaction of the two. Incongruity and unfavorability also significantly affect maturity and loan amounts.