The Efficiency of Savings-Linked Relationship Lending for Housing Finance

We characterize Contractual Saving for Housing (CSH), a widespread and important product of household housing finance in Continental Europe, as relationship lending that is based on information production about borrowers in preceding saving relationships. In a multi-period partial equilibrium model of lending to households, we compare such savings-linked relationship lending with arm's-length lending. Our model shows that savings-linked relationship lending leads to a Pareto improvement or an increase in the allocative efficiency of the financing market compared to arm's-length lending in markets of low time preference or low average borrower quality. In these markets, savings-linked relationship lending can overcome financing market failure due to adverse selection, which is especially true for financing volumes that are large in comparison to households' incomes. Hence, savings-linked relationship lending can in particular support housing purchases of low-income households and is able to increase home ownership rates. Our work provides, to our knowledge, the first theoretical relationship lending explanation for CSH. Further, our results add a novel economic explanation for synergies between the two main activities of traditional commercial banking, deposit-taking and lending