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Bank-firm relationships: a review of the implications for firms and banks in normal and crisis times

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Abstract

Banks are important providers of external finance to firms. In order to solve asymmetric information problems, firms and banks often engage in bank-firm relationships. Relationship banking occurs when a bank and a borrower enter multiple mutual interactions and both parties invest in obtaining some counterparty specific information, binding bank and firm, to a certain degree, to each other. This chapter starts with a discussion of reasons for having exclusive versus non-exclusive relationships. It provides a concise overview on the determinants of the number and intensity of bank-firm relationships, and reviews how relationship banking generates costs and benefits for both banks and firms. We show that on average bank-firm relationships generate value for both. The costs and benefits of bank-firm relationships, however, vary substantially with whether an economy is in normal or crisis times