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“Time for a Change”: Loan Conditions and Bank Behavior when Firms Switch Banks
Author(s) -
IOANNIDOU VASSO,
ONGENA STEVEN
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2010.01596.x
Subject(s) - loan , cross collateralization , business , participation loan , matching (statistics) , non conforming loan , fixed interest rate loan , monetary economics , term loan , financial system , work (physics) , interest rate , soft loan , economics , non performing loan , finance , engineering , mathematics , mechanical engineering , statistics
This paper studies loan conditions when firms switch banks. Recent theoretical work on bank–firm relationships motivates our matching models. The dynamic cycle of the loan rate that we uncover is as follows: a loan granted by a new (outside) bank carries a loan rate that is significantly lower than the rates on comparable new loans from the firm's current (inside) banks. The new bank initially decreases the loan rate further but eventually ratchets it up sharply. Other loan conditions follow a similar economically relevant pattern. This bank strategy is consistent with the existence of hold‐up costs in bank–firm relationships.