Loan officer

• At such times, managing lending relationships effectively becomes even more important for bank governance, risk, and credit supply.
• My study presents evidence that continuous lending relationships between bank loan officers and corporate borrowers improve the outcomes of loan renegotiations.
• My main findings are that firms that experience an exogenous interruption in their loan officer relationship are faced with three consequences.
• First, the firms are less likely to renegotiate a loan compared to firms with continuous relationships.
• Second, when loans are renegotiated, firms with interrupted loan officer relationships receive tougher loan terms.

Introduction

• Firms in the euro area rely to a large extent on loans from credit institutions.
• Such loans account for approximately 30% of euro area firms total liabilities and approximately 85% of their total credit.
• For that reason, the relationship between a loan officer and a firm is expected to affect the issuance and renegotiation of a loan.
• The central finding of the paper is that relationships between loan officers and firms do have a significant positive impact on loan renegotiation.
• In this study firms with interrupted relationships are less likely to renegotiate a loan compared to firms with continuous relationships.
• Lastly, firms alter their capital structure and sources of financing after the relationship with the loan officer is interrupted.

Interruption of bank lending relationships

• Lending relationships between loan officers and borrowers may be interrupted as a consequence of bank mergers and consolidations, interventions by banking supervisors, fintech developments or regular staff rotation policies.
• For example, banks often consolidate their branch networks in response to financial distress, as consolidation reduces operating costs and centralises lending decisions.
• There are two main challenges for accurately estimating the impact of lending relationships on loan renegotiation.
• The reorganisation of the bank gives rise to variation in the length of the relationships between loan officers and firms that is exogenous, i.e.
• A bank unit closure interrupts the relationships between loan officers and firms, because merged accounts are assigned to new loan officers.
• Hard information passes from one loan officer to another during transfers, because the transfer happens within the same bank.
• Therefore any differences observed between the two groups after the consolidation period should be the consequence of interrupted relationships.

Impact on loan renegotiation

• According to my results, firms assigned to a new loan officer were significantly less likely to renegotiate a loan.
• The empirical results show a statistically significant difference in the probability of these firms renegotiating a loan compared to firms with continuous relationships.
• In particular, the results imply a 49% probability of loan renegotiation for firms with an interrupted relationship, compared with a 59% probability for firms with a continuous relationship.
• After the reorganisation (2014-15), the probability of renegotiating a loan is lower for the firms with interrupted relationships.

Figure 1

Effect of an interruption in the relationship between a loan officer and a firm on loan renegotiation relative to the year before the reorganisation (2013) Source: Papoutsi (2021).
• Moreover, when loans are renegotiated, the firms with interrupted loan officer relationships receive less beneficial terms and conditions on their renegotiated loans than firms with continuous relationships.
• Firms with interrupted relationships face higher interest rates and significantly shorter maturities, while being required to pledge collateral for an amount 65% higher than firms with continuous relationships.
• The plots below present the evolution of these results graphically.
• The difference in the loan terms appears in the first year after the interruption of the relationship and increases the following year.

Figure 2

Impact of interrupted relationships on renegotiated loans’ terms relative to the year before the reorganisation (2013) Effect on interest rate Effect on collateral value Source: Papoutsi (2021).
• A change in the capital structure indicates that firms cannot simply substitute lending from other banks without cost when the relationship with one bank is interrupted.
• Firms only partially substitute loans from other banks to make up for reducing the borrowing from the bank where its loan officer relationship was severed.
• First, we do not observe a difference in loan performance in the short run between firms with interrupted relationships and firms with continuous relationships.
• This means that the effects on the terms and conditions of renegotiated loans cannot be explained by firms performing worse economically.
• In contrast, the impact of an interrupted loan officer relationship on loan renegotiation is found to be stronger for firms with good repayment histories, high leverage, and positive growth in earnings.

Conclusions

• This analysis shows that lending relationships have a significant positive effect on corporate loan renegotiation, mitigating the cost of distress for firms.
• Even though the analysis is not directly linked to the COVID-19 crisis, it provides strong evidence that continuous lending relationships help firms during default episodes.
• An uninterrupted relationship between a particular loan officer and a firm helps eliminate frictions that arise when loans are renegotiated.
• For example, in a context of general stress, individual firms could experience interruptions to several different bank loan officer relationships.
• Indeed, while no one is irreplaceable, when it comes to a firms relationship with a bank changing loan officer can be a big deal.

References

• Incentivizing calculated risk-taking: Evidence from an experiment with commercial bank loan officers, The Journal of Finance, Vol.
• 70, pp.
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• Information and incentives inside the firm: Evidence from loan officer rotation, The Journal of Finance, Vol.
• 65, pp.
• 73, pp.
• Estimating the effect of hierarchies on information use, The Review of Financial Studies, Vol.
• 22, pp.