Relationship banking during times of distress - A study of what factors affect the actions taken by Swedish banks when a borrowing firm is undergoing financial distress

Sammanfattning: This paper investigates what factors affect Swedish banks' behaviour in situations where medium sized commercial customers experience financial distress. The empirical findings are based on qualitative data acquired through 27 interviews with representatives from the four largest Swedish banks, financial advisors and experts, as well as equity investors. Our results indicate that Swedish banks rarely terminate the relationship with a borrowing company in financial distress. Governing factors behind such a course of action are relationship reasons, reputational effects as well as the Swedish bankruptcy legislation and accounting standards. On a few occasions, the banks might terminate existing relationships due to the unviable nature of a customers' business or as a result of equity holders acting dishonestly. However, our empirical research suggests that Swedish banks' primarily seek to retain existing relationships and instead salvage their outstanding loans and credits through a mix of financial and operational measures. This thesis adds to existing knowledge, as it highlights how relationship banking affects the resolution of financial distress. Also, we offer an insight into why certain actions are taken and the role of creditors in the corporate governance of financially distressed companies.