Big Broad Banks: How Does Cross-selling Affect Lending?

This paper provides evidence that banks make lending decisions based on the borrower’s overall profitability to the bank and identifies this profit channel. Specifically, I show that non-loan profit affects bank lending using both internal data of a large bank and the Swedish credit registry. I disentangle the profit channel from the well-known information channel, and document that non-loan profit increases 1) credit supply and 2) lenience in delinquency. For identification, I exploit Basel II-induced exogenous variation in products' profitability and find that the average affected firms experienced a decrease of 6.1% ($400,000) in credit supply and 24% (9.9 pp) in lenience in delinquency. As a result, affected firms reduced investment by 8.4%.