"The Sources of Value of Relationships: Screening, Monitoring and the Likelihood of Consumer Default"

This paper analyzes the importance of retail consumers’ banking relationships for their loan defaults. We find that loans of retail customers, who have a relationship with their savings bank when they apply for a loan, default significantly less than customers with no prior relationship. We find relationships matter in different forms (transaction accounts, savings accounts, prior loans), in scope (credit and debit cards, credit lines), and depth (relationship length, utilization of credit line, money invested in savings account).We find that the banks’ screening policy is geared to minimize default risk. We also find that banks’ screening process is not deterministic but includes elements of subjective assessment or discretion which is associated with lower frequencies of defaults. Even after taking screening into account, relationships still have a first order impact in reducing borrower defaults. In other words, we identify a distinct value of existing relationships in screening based on discretionary behavior of banks as well as in monitoring.