The Cost of Involuntary Relationship Destruction

Since 2001, our focal bank in this paper, which is one of China's largest commercial banks, has been implementing the China Banking Regulatory Commission's (CBRC) regulation regarding the "localization of credit issuance to firms". Under this regulation, a customer would be required to relocate its banking business away from its current branch to a new branch, established by the same bank, opened in the same official district as the customer. As a result, the existing relationship between the customer and its current branch would likely be involuntarily terminated, impacting more opaque customers whose "soft" information is extremely important to bank branch loan officers' decisions. Using a unique data base from our focal bank, we investigate the cost to the customer of involuntary bank branch relocation, or what we call the cost of "relationship destruction".