When a bank is a relationship lender, its financial health affects its borrowers’ access to credit. If regulators or depositors might close a bank, it will take any action necessary to remain open. This leads to excessive foreclosure of the bank’s relationship-based loans or to the bank’s inability to collect existing loans due to its fear of accounting losses if it forecloses. Recapitalization of banks possessing relationship-based loans can be good policy. However, providing a positive but too small amount of capital can be worse than providing none. There is no reason to provide subsidized capital to banks without relationship-based loans.
Our Research Focus: Financial Markets and Institutions
Amanda L. Kramer
To receive a notification by email when Economic Quarterly is posted online or to order single copies of past issues, click on the links below (published online only since 2012).