Abstract - “Time for a Change”: Loan Conditions and Bank Behavior When Firms Switch
We study a unique database allowing us to follow firms and banks through an extended period of time. As a result, we can document the full dynamic cycle of bank loan conditions, firm repayment behavior, and bank rating before and after firms switch banks. Our findings suggest that a new loan granted by an outside bank, that was not engaged by the firm before, carries a loan rate that is more than 80 basis points lower than the rates on comparable new loans from its current inside banks. The new bank is willing to decrease loan rates further by another 35 basis points within the next year and a half. After that the new bank starts hiking its loan rate, slowly at first but eventually at a clip of more than 30 basis points per year. After four years the loan rate charged by the new bank equals what the firm obtained from its former inside banks before switching. Independently of the loan rate, switching also involves increasing loan maturity and loan size. Maturity shortens again afterwards. Although the information-sharing regime in place allows the outside banks to attract mostly firms that repay, outside banks still suffer from adverse selection because the credit information available is limited to two months prior to their information request. A distinct feature of the loan condition cycle is that outside banks attribute the best rating to almost the entire pool of new customers, in contrast to the current inside lenders of the firm whose discriminating ratings effectively determine the offered loan rates.