The bright side of relationship lending: cooperative banks and corporate loans

This paper examines whether cooperative banks have different loan terms from commercial banks for corporate loans. Our analysis is based on a unique dataset of around 233,000 corporate loans granted by all French private banks. We find that cooperative banks charge higher rates and require less collateral than commercial banks. However, we show that relationship lending has opposite effects on loan terms depending on the type of bank. Longer relationships reduce interest rates and collateral requirements for cooperative banks, but increase these lending conditions for commercial banks. Furthermore, we find that the beneficial effects of relationship lending for cooperative banks are amplified for financially fragile firms. We therefore support the view that cooperative banks are initially more expensive, but that relationship lending allows them to overcome this over time and ultimately pass on information gains to borrowers through better lending terms.