Relationship Lending and the Great Depression: New Measurement and Implications

Jon Cohen, Kinda Cheryl Hachem, Gary Richardson

NBER Working Paper No. 22891
Issued in December 2016, Revised in September 2017
NBER Program(s):Corporate Finance, Development of the American Economy, Economic Fluctuations and Growth, Monetary Economics

We demonstrate empirically that the collapse of long-term lending relationships amplified the severity of the Great Depression and affected the pace of recovery. We overcome the lack of loan-level data for this period by developing a new measure of continuing relationships that can be calculated at any level of aggregation. Our approach is based on the idea that loan rates charged in continuing relationships are less responsive to changes in bank funding costs than are those charged on other loans. After establishing the validity of this approach for a period when microeconomic data on lending relationships do exist, we show, first, that the marginal impact of bank suspensions on economic activity in the early 1930s was significantly higher in areas with more continuing relationships and, second, that the rebuilding of lending relationships destroyed by suspensions helps explain economic performance during the 1937-38 recession.

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Document Object Identifier (DOI): 10.3386/w22891

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