Relationship Networks in Banking Around a Sovereign Default and Currency Crisis

We build a model characterized by matching frictions in which firms establish (long-term) relationships with banks that are subject to balance sheet disruptions. Credit relationships with banks more exposed to the crisis suffer the most. However, this relationship-level effect overstates the true cost of the crisis since profitable firms (e.g., exporters after a devaluation) might find it optimal to switch lenders, reducing the negative impact on overall credit and activity. Using linked bank-firm and firm-level data we find evidence largely consistent with our theory.