The Political Economy of Relationship Banking

In the aftermath of the global financial crisis, banks need to reevaluate their position in light of profound changes in the economic, social, and political landscape. On the one hand, we emphasize the benefits of relationship banking, which establishes close contact with bank customers. Through a long-term orientation, relationship banking aligns incentives and supports the long-term needs of bank customers, leading to reduced inequality and greater firm innovation. On the other hand, the interaction between politics and relationship banking can have dark sides. First, with new borders arising and competition in banking affected, relationship banking might be particularly prone to political interference. Second, a shock to the relationship bank can be transmitted to its borrowers. We analyze how relationship banking can overcome its drawbacks