Are Relationship and Transactional Banks Different? Evidence from Loan Loss Provisions and Write-Offs

Abstract

We compare the write-off and loan loss provision practices of relationship versus transactional banks. Relationship banks provide both debt and equity financing to their clients, have long-lasting ties with them, serve on their boards of directors and in some cases serve as senior managers, and renegotiate debt contracts during periods of financial stress. While these extensive links should provide the relationship banks better quality information about their borrowers, the links might also change their incentives and make them relatively more reluctant to provision for and write off nonperforming loans. Our results indicate that the incentive effects dominate the information effects.

Keywords: loan loss provisions, write-offs, relationship or universal banks

JEL Classification: G21, G28, G33