Does Main Bank's Health Matter in Firm Customers' Behavior? A Study Based on Bank-Firm Matching Data of SMEs

Author Name OGAWA Kazuo  (Institute of Social and Economic Research, Osaka University)
Creation Date/NO. November 2005 05-J-031
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This paper presents an empirical analysis of how the deterioration of a main bank's health affects the behavior of its corporate customers. This study has three key features. First, the study focuses on small and medium-size enterprises (SMEs), analyzing how their behavior is influenced by their main bank's health. Second, the study uses microdata taken from the government's survey on the financial environment of SMEs, conducted in 2001, 2002 and 2003 by the Small and Medium Enterprises Agency. The survey is unique since we can identify the main banks of the sampled SMEs and it contains rich information on the main bank relationship. Particularly, in examining the effects of a main bank's health on corporate customers, we can disentangle the total effects into two parts: those arising from the lender-borrower relationship and those from other main bank relationships. Third, the study covers a variety of firm activities including fixed investment, employment and liquidity demand, and examines the bank's health effects from broader perspective.

The empirical findings from the study are summarized as follows. A higher bad loan ratio of the main bank restrains its lending to corporate customers, leading to reductions of both fixed investment and employment. Corporate customers also decrease their liquid assets to make up the reduced loans. In addition to deterioration of the lender-borrower relationship, other services provided by the main bank weaken, resulting in further reductions in fixed investments and employment of corporate customers. On the other hand, corporate customers pile up liquid assets as a precautionary motive to cope with further worsening of a bank's health in the future.