This paper investigates whether the benefits of bank–borrower relationships differ depending on three factors identified in the theoretical literature: verifiability of information, bank size and complexity, and bank competition. We extend the current literature by analyzing how relationship lending affects loan contract terms and credit availability in an empirical model that simultaneously accounts for all three of these factors. Based on Japanese survey data we find evidence that the benefits from stronger bank–borrower relationships in terms of credit availability are limited to smaller banks. However, when the benefits are measured as improved credit terms, we find little additional benefit, and in some cases increased cost, from stronger relationships for opaque borrowers and for borrowers who get funding from small banks. These latter findings suggest the possibility that relationship borrowers may suffer from capture effects.

In this paper we propose a new test of the efficient structure (ES) hypothesis, which predicts that efficient firms come out ahead in competition and grow as a result. Our test has significant advantages over existing ones, because it is more direct, and can jointly test the so-called quiet-life hypothesis, which predicts that in a concentrated market firms do not minimize costs. We then apply this test to large banks in Japan. Consistent with the ES hypothesis, we find that more efficient banks become larger. We also find that market concentration reduces banks’ efficiency, which supports the quiet-life hypothesis. These findings imply that there is an intriguing growth–efficiency dynamic throughout banks’ life cycle, although our findings also suggest that the ES hypothesis dominates the quiet-life hypothesis in terms of economic impact.

Using unique micro data compiled from the real estate registry in Japan, we examine more than 400,000 loan-to-value (LTV) business loan ratios to draw implications for caps on LTV ratios as a macroprudential policy measure. We find that the LTV ratio exhibits counter-cyclicality, behavior that would have severely impeded the efficacy of a simple LTV cap had it been imposed. We also find that borrowers obtaining high-LTV loans are more risky but grew faster than those with lower LTV loans, which implies that a simple fixed cap on LTV ratios might inhibit growing (albeit risky) firms from borrowing.

This paper compares the economic impact of the collateral and bank lending channels in a unified framework by taking advantage of exogenous shocks to firms’ tangible assets and banks’ net worth caused by the massive Tohoku earthquake in 2011. We obtain the following findings: (1) both damage to a firm's tangible assets and to the net worth of its primary bank lead to an increase in the probability of the firm being credit constrained, which lends support to the existence of both the collateral and the bank lending channel; (2) the increase through the bank lending channel is about twice as large as and longer-lasting than that through the collateral channel; (3) the credit constraint has real effects: in terms of the aggregated sales decline, the impact through the bank lending channel is more than four times as large as that through the collateral channel, because the negative impact of damage to banks’ net worth spilled over to firms located outside the earthquake-damaged region. Overall, the bank lending channel played a far more substantial role than the collateral channel in the wake of the earthquake.