Bank Heterogeneity and Interest Rate Setting: What Lessons Have We Learned since Lehman Brothers?

Authors

  • LEONARDO GAMBACORTA,

  • PAOLO EMILIO MISTRULLI


  • The views expressed are of the authors only and do not necessarily reflect those of the Bank of Italy or the Bank for International Settlements. We would like to thank the Editor (Bob DeYoung) and two anonymous referees for excellent guidance on the final version of the manuscript. We have also benefited from comments from Michele Benvenuti, Claudio Borio, Vittoria Cerasi, Petra Gerlach-Kristen, Enisse Kharroubi, Michael King, Danilo Liberati, Pat McGuire, Andrea Presbitero, Zeno Rotondi, Enrico Sette, Kostas Tsatsaronis, and participants at seminars held at the European Economic Association, Società Italiana degli Economisti, Banque de France, Bank for International Settlements, and Bank of Italy. We are grateful to Ginette Eramo and Roberto Felici for excellent research assistance.

Abstract

A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank-specific characteristics affect the functioning of the credit market in an economy-wide crisis. We investigate how bank and bank–firm relationship characteristics have influenced interest rate setting since the collapse of Lehman Brothers. We find that interest rate spreads increased by less for those borrowers having closer lending relationships. Furthermore, firms borrowing from banks endowed with large capital and liquidity buffers and from banks engaged mainly in traditional lending were kept more insulated from the financial crisis.

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