We use proprietary data to analyze the importance of retail banking relationships to commercial banks and their depositors when banks underwrite securities. We find lead underwriters’ retail customers benefit as they demand and end up with significantly more of the highly underpriced issues. We find it is actual underpricing beyond that predicted by grey markets that drive the differential demand from the lead bank retail clientele, suggesting that banks pass on information about underpriced initial public offerings to their retail depositors. We analyze banks’ incentives for such behavior and find evidence of banks benefiting through retail cross-selling—both brokerage accounts and consumer loans increase significantly.

This paper examines the broader effects of the US financial crisis on global lending to retail customers. In particular we examine retail bank lending in Germany using a unique data set of German savings banks during the period 2006 through 2008 for which we have the universe of loan applications and loans granted. Our experimental setting allows us to distinguish between savings banks affected by the US financial crisis through their holdings in Landesbanken with substantial subprime exposure and unaffected savings banks. The data enable us to distinguish between demand and supply side effects of bank lending and find that the US financial crisis induced a contraction in the supply of retail lending in Germany. While demand for loans goes down, it is not substantially different for the affected and nonaffected banks. More important, we find evidence of a significant supply side effect in that the affected banks reject substantially more loan applications than nonaffected banks. This result is particularly strong for smaller and more liquidity-constrained banks as well as for mortgage as compared with consumer loans. We also find that bank-depositor relationships help mitigate these supply side effects.