The Relevance of Relationship Lending in Times of Crisis
46 Pages Posted: 9 Oct 2020 Last revised: 12 Nov 2020
Date Written: September 2020
Exploring the Paycheck Protection Program, a setting that allows clear identification of relationship lending effects during the COVID-19 crisis, we find that relationship borrowers receive economically significant larger loans and faster approvals. In the absence of lenders' information advantage motivation documented in prior literature, because the program disregards borrower's credit risk, we examine alternative channels for these benefits. We find that lenders prioritize relationship borrowers mainly due to concerns with the increasing risk of default on borrowers' pre-crisis debt in their portfolios. The benefits we document come with costs. Borrowers are more likely to violate PPP rules when a relationship exists.
Keywords: Relationship Lending, Paycheck Protection Program, COVID-19 Crisis
JEL Classification: G01, G21, G38, H32, H81, H84
Suggested Citation: Suggested Citation