Relationship lending and SMEs’ funding costs over the cycle: Why diversification of borrowing matters

Using a unique panel design that enables to control for bank, firm, market and loan heterogeneities, we confirm relationship lenders charge higher rates in good times lower bad times. However, show risky single-bank firms do not benefit from this insurance mechanism are “held-up” by lenders. Local bank competition non-bank finance dependence alleviate information-monopolistic behavior. Finally, long-term loans small, non-trading-oriented well-capitalized banks drive the benefits of lending.