Research Insights

Are bankers umbrellas for a sunny day?

By Dr. Byron Y. Song

Are bankers umbrellas for a sunny day?

Businessmen worldwide had a hunch that Mark Twain was right when he described a banker as: “a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” Profs. Byron Y. Song, Jeong-Bon Kim and Yue Zhang validated Twain’s early insight into the psyche of bankers in this paper. This research uses a sample of 3,725 loan-facilities financial data collected over 17 years to shed a light on how commercial lenders adjust credit terms when reacting to earnings announcements of supplier firms’ customers.

In the past two decades, the banking sector has undergone dramatic changes that made corporate finance managers’ life less easy. Debt financing could be a headache. Readers who would find this research interesting are financial controllers and corporate finance managers of mid- to small capital listed companies, who have to deal with banks for financing.

The relationship between suppliers and their customers is intricate throughout the supply chain. As many suppliers tend to rely heavily on a few customers, their economic survival often depends on the performance of their customers. The study finds that strong earnings performance of major customers (as expressed by a superior return on assets level) is indeed associated with favourable terms on credit extended to suppliers. When their customers do well, suppliers can expect lower interest rates and more lenient non-price covenants.

Moreover, relationships matter. When the relationship between a supplier and its bank is new, the bank’s reaction to an earnings announcement is to impose more stringent credit terms on the supplier. This is especially true for suppliers relying on a few customers in a highly concentrated industry in the product market.

Suppliers can alleviate this risk by developing better banking relationships. When a bank has been doing business with a supplier firm for a long time, it develops a level of comfort with the customer’s operations, business and industry. This often tempers the stringency of the bank’s reaction to an earnings announcement pointing to deteriorating trading conditions of the supplier firm’s customers. Therefore, along the whole value chain, suppliers are not without bargaining power when asking for loan facilities.


Kim, J., Song, Byron Y., & Zhang, Y. (2015). Earnings performance of major customers and bank loan contracting with suppliers. Journal of Banking and Finance, 59, 384-398.