Financial Markets and Portfolio Management

, Volume 21, Issue 4, pp 445–470 | Cite as

Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotiation incidences?

  • Christina E. Bannier


Small and medium-sized firms often obtain capital via a mixture of relationship and arm’s-length bank lending. We show that such heterogeneous multiple bank financing leads to a lower probability of inefficient credit foreclosure than both monopoly relationship lending and homogeneous multiple bank financing. Yet, in order to reduce hold-up and coordination-failure risk, the relationship bank’s fraction of total firm debt must not become too large. For firms with intermediate expected profits, the probability of inefficient credit-renegotiation is shown to decrease along with the relationship bank’s information precision. For firms with extremely high or extremely low expected returns, however, it increases.


Relationship lending Asymmetric information Financial distress Hold-up Coordination failure 


D82 G21 L14 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Bannier, C.: Big elephants in small ponds: do large traders make financial markets more aggressive? J. Monet. Econ. 52, 1517–1531 (2005) CrossRefGoogle Scholar
  2. Bolton, P., Scharfstein, D.S.: Optimal debt structure and the number of creditors. J. Political Econ. 104, 1–25 (1996) CrossRefGoogle Scholar
  3. Brittain, B.: The transformation of European banking. Financ. Mark. Portfolio Manag. 15, 49–58 (2001) CrossRefGoogle Scholar
  4. Brunner, A., Krahnen, J.P.: Multiple lenders and corporate distress: evidence on debt restructuring. CFS Working paper No. 2001/04, revised, Frankfurt (2006) Google Scholar
  5. Carletti, E.: The structure of bank relationships, endogenous monitoring and loan rates. J. Financ. Intermediation 13, 58–86 (2004) CrossRefGoogle Scholar
  6. Corsetti, G., Dasgupta, A., Morris, S., Shin, H.S.: Does one Soros make a difference? A theory of currency crises with large and small traders. Rev. Econ. Stud. 71, 87–114 (2001) CrossRefGoogle Scholar
  7. D’Auria, C., Foglia, A., Marullo-Reedtz, P.: Bank interest rates and credit relationships in Italy. J. Bank. Finance 23, 1067–1093 (1999) CrossRefGoogle Scholar
  8. Detragiache, E., Garella, P., Guiso, L.: Multiple versus single banking relationships: theory and evidence. J. Finance 55, 1133–1161 (2000) CrossRefGoogle Scholar
  9. Diamond, D.W.: Financial intermediation and delegated monitoring. Rev. Econ. Stud. 51, 393–414 (1984) CrossRefGoogle Scholar
  10. Diamond, D.W.: Debt maturity structure and liquidity risk. Q. J. Econ. 106, 709–737 (1991) CrossRefGoogle Scholar
  11. Elsas, R., Krahnen, J.P.: Is relationship lending special? Evidence from credit-file data in Germany. J. Bank. Finance 22, 1283–1316 (1998) CrossRefGoogle Scholar
  12. Elsas, R., Heinemann, F., Tyrell, M.: Multiple but asymmetric bank financing: the case of relationship lending. Working paper series: Finance and accounting No. 141, Goethe-University, Frankfurt (2004) Google Scholar
  13. Farinha, L.A., Santos, J.A.C.: Switching from single to multiple bank lending relationships: determinants and implications. J. Financ. Intermediation 11, 124–151 (2002) CrossRefGoogle Scholar
  14. Foglia, A., Laviola, S., Marullo-Reedtz, P.: Multiple banking relationships and the fragility of corporate borrowers. J. Bank. Finance 22, 1441–1456 (1998) CrossRefGoogle Scholar
  15. Gilson, S.H., Kose, J., Lang, L.H.: Troubled debt restructurings: an empirical study of private reorganization of firms in default. J. Financ. Econ. 27, 315–353 (1990) CrossRefGoogle Scholar
  16. Harhoff, D., Körting, T.: Lending relationships in Germany—empirical evidence from survey data. J. Bank. Finance 22, 1317–1353 (1998) CrossRefGoogle Scholar
  17. Hubert, F., Schäfer, D.: Coordination failure with multiple-source lending: the cost of protection against a powerful lender. J. Institutional Theor. Econ. 158, 256–275 (2002) CrossRefGoogle Scholar
  18. James, C.: When do banks take equity in debt restructurings? Rev. Financ. Stud. 8, 1209–1234 (1995) CrossRefGoogle Scholar
  19. James, C.: Bank debt restructurings and the composition of exchange offers in financial distress. J. Finance 51, 711–727 (1996) CrossRefGoogle Scholar
  20. Jobst, A.: Collateralised loan obligations (CLOs): a primer. Secur. Conduit 6, 1–4 (2003) Google Scholar
  21. Machauer, A., Weber, M.: Number of bank relationships: an indicator of competition, borrower quality, or just size? Working paper No. 01-04, University of Mannheim (2001) Google Scholar
  22. Morris, S., Shin, H.S.: Global games: theory and applications. In: Dewatripont, M., Hansen, L., Turnovsky, S. (eds.) Advances in Economics and Econometrics, the Eighth World Congress. Cambridge University Press, Cambridge (2003) Google Scholar
  23. Morris, S., Shin, H.S.: Coordination risk and the price of debt. Eur. Econ. Rev. 48, 133–153 (2004) CrossRefGoogle Scholar
  24. Neugebauer, T., Perote, J.P.: Bidding “as if” risk neutral in experimental first price auctions without information feedback. Mimeo, Leibniz University, Hannover (2006) Google Scholar
  25. Neugebauer, T., Selten, R.: Individual behavior of first-price auctions: The importance of information feedback in computerized experimental markets. Games Econ. Behav. 54, 183–204 (2006) CrossRefGoogle Scholar
  26. Ongena, S., Smith, D.C.: What determines the number of bank relationships? Cross-country evidence. J. Financ. Intermediation 9, 26–56 (2000) CrossRefGoogle Scholar
  27. Pagratis, S.: Coordination failure, herding and the signalling role of banks in debt-exchange offers. Financial Markets Group discussion paper No. 420, London School of Economics, revised (2005) Google Scholar
  28. Petersen, M.A., Rajan, R.G.: The benefits of lending relationships: evidence from small business data. J. Finance 49, 3–37 (1994) CrossRefGoogle Scholar
  29. Rajan, R.G.: Insiders and outsiders: The choice between informed and arm’s-length debt. J. Finance 47, 1367–1400 (1992) CrossRefGoogle Scholar
  30. Schmidt, R.H.: The future of banking in Europe. Financ. Mark. Portfolio Manag. 15, 429–449 (2001) CrossRefGoogle Scholar
  31. Sharpe, S.A.: Asymmetric information, bank lending, and implicit contracts: A stylized model of customer relationships. J. Finance 45, 1069–1087 (1990) Google Scholar
  32. The Economist: Without credit—financing Germany’s mittelstand (1–7 November 2003) Google Scholar
  33. Von Thadden, E.-L.: The commitment of finance, duplicated monitoring, and the investment horizon. CEPR discussion paper No. 27 (1992) Google Scholar

Copyright information

© Swiss Society for Financial Market Research 2007

Authors and Affiliations

  1. 1.Department of Banking and FinanceFrankfurt School of Finance and ManagementFrankfurtGermany

Personalised recommendations