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On the Importance of Prior Relationships in Bank Loans to Retail Customers

This paper analyzes the importance of retail consumers’ banking relationships for loan defaults using a unique, comprehensive dataset of over one million loans by savings banks in Germany. We find that loans of retail customers, who have a relationship with their savings bank prior to applying for a loan, default significantly less than customers with no prior relationship. We find relationships matter in different forms (transaction accounts, savings accounts, prior loans), in scope (credit and debit cards, credit lines), and depth (relationship length, utilization of credit line, money invested in savings account). Importantly, though, even the simplest forms. | On the Importance of Prior Relationships in Bank Loans to Retail Customers Manju Puri t Jorg Rocholl and Sascha Steffen November 2010 Abstract This paper analyzes the importance of retail consumers banking relationships for loan defaults using a unique comprehensive dataset of over one million loans by savings banks in Germany. We find that loans of retail customers who have a relationship with their savings bank prior to applying for a loan default significantly less than customers with no prior relationship. We find relationships matter in different forms transaction accounts savings accounts prior loans in scope credit and debit cards credit lines and depth relationship length utilization of credit line money invested in savings account . Importantly though even the simplest forms of relationships such as transaction accounts e.g. savings or checking accounts are economically meaningful in reducing defaults even after controlling for other borrower characteristics as well as internal and external credit scores. We are able to access data on loan applications to assess how banks screen. We find that relationships are important in screening but even after taking screening into account relationships have a first order impact in reducing borrower default. Our results suggest that relationships of all kinds have inherent private information and are valuable in screening in monitoring and in reducing consumers incentives to default. We thank the Deutscher Sparkassen- und Giroverband DSGV for providing us with the data and Rebel Cole Hans Degryse Valeriya Dinger Radhakrishnan Gopalan Reint Gropp David Musto Lars Norden Martin Weber Vijay Yeramilli participants at the EFA 2010 Frankfurt meeting the FDIC-JFSR Bank Research Conference the FMA 2010 meeting the CAREFIN 2010 Conference at Bocconi the German Finance Association Meeting DGF and seminar participants at Drexel University Erasmus University Rotterdam Georgia Tech University University of Cologne University of .