Relationship Banking: Understanding Bank-Customer Interactions

This lecture explores the concept of relationship banking, which goes beyond traditional transactional banking by focusing on building long-lasting relationships with business customers. The instructor discusses the benefits of relationship banking, such as repeated lending and cross-selling. The lecture also delves into the dynamics of bank relationships among Swiss households and small to medium-sized enterprises (SMEs). Through a model analysis, the lecture demonstrates how relationship banking mitigates information asymmetry and moral hazard, leading to more favorable lending outcomes over multiple periods. The implications of competition, adverse selection, and potential solutions to these challenges are also discussed, highlighting the importance of relationship banking for 'opaque' firms.