The paper assesses the relative effectiveness of different lending techniques during boom and bust times. Theory suggests that while relationship
and transaction-based lenders (where the former rely on soft information and longer-term relationships with their borrowers, while the latter rely more on hard assets and hard information for screening and monitoring) can be substitutes during good times,
relationship lenders have an advantage in crisis times given their deeper information on borrowers. We combine a bank-level survey on lending techniques with firm-level survey information financing constraints across 21 Central and Eastern European countries.
Matching the geographic coordinates of these banks’ branches and firms’ location, we then test whether firms’ financing constraints vary with the relative geographic proximity of relationship lenders, during good times (2005) and crisis
times (2008/9). We find that while relationship lending is not associated with credit constraints during a credit boom, it alleviates such constraints during a downturn. This positive role of relationship lending is stronger for small and opaque firms
and in regions with a more severe economic downturn. Moreover, our evidence suggests that relationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans.