Corporate Governance, Relationship Lending and Monetary Policy: Firm-Level Evidence for the Euro Area

We show by means of a bank relationship model that after monetary policy tightening, public firms (having easier access to public capital markets) are more likely to decrease their demand for bank loans than private firms (which are typically more dependent on bank credit and benefit more from relationship lending). This 'relationship lending' hypothesis is opposite to the 'credit view' that holds that bank dependent firms are hit more strongly by credit rationing after monetary tightening. Next, we empirically test both hypotheses against each other. Our estimation results, based on a sample of around 22,000 firms in the euro area plus the UK during most of the 1990s, yield evidence in favour of the relationship lending hypothesis, particularly for private and small firms.