Bank Deposits and Relationship Lending∗

I study the role of deposit accounts in bank-firm lending relationships, using a dataset with detailed information about all Norwegian firms’ bank deposit and loan account balances. I show that firms are more likely to increase borrowing from a bank where they hold deposit accounts, and less likely to end the lending relationship. In regressions with both firm and bank fixed effects, I find that bank lending relationships where firms hold deposit accounts are less likely to end after the bank experiences distress, proxied by write-downs on the bank’s loan portfolio, relative to other lending relationships. This finding is consistent with the hypothesis that a bank will prefer deposit-holding firm borrowers when forced to scale down its loan customer base, and is thus suggestive that deposit accounts provide some added value to the banking relationship. ∗I thank The Norwegian Ministry of Finance and the Norwegian Tax Authorities for generous provisioning of data and Finansmarkedsfondet for financing, and Jørgen Haug for comments and suggestions. †Department of Finance and Management Science, The Norwegian School of Economics and Business Administration (NHH), Helleveien 30, N-5045 Bergen (email:[email protected])