How Do Changes in Financial Reporting Standards Affect Relationship Lending?

This paper studies the effect of the expected credit loss model under IFRS 9 on relationship lending in Spain. We document that the relationship exclusivity between a bank and a firm has a positive effect on the growth of credit. However, such positive effect is significantly reduced after IFRS 9. Considering borrowers in Stage 1, we show that the negative impact of the new regulation on relationship lending is present for firms with a higher probability of default and whose credit quality has deteriorated. Our findings are consistent with a change in the incentives that underpin relationship lending. After IFRS 9, banks holding a more exclusive relationship with a firm are less willing to further increase their exposure if this may imply large expected credit losses at loan origination and a high probability that the borrower downgrades to Stage 2 in future periods