from other lenders. Treated borrowers with other loans, however, de-prioritize repayment of those loans, and more so if forbearance was granted by the lender than by the government. This result suggests that promoting competition between lenders may have meaningful implications for overall loan performance during crises, given that forbearance policies can exert externalities across lenders.

We explore several competing mechanisms that can explain _why_ moratorium offers extended by one’s lender improve loan repayment. Intuitively, temporary debt forbearance may have positive effects on loan repayment through two main channels. First, temporary payment deferrals may improve a borrower’s ability to repay by relaxing temporary liquidity constraints. We rule out this possibility by showing that forbearance offers framed as coming from the lender affect loan repayment, while contractually _identical_ offers framed as an initiative of the regulator do not. We additionally show that the take-up rate of the two offers is the same and that there is no differential selection into forbearance along observable characteristics. This implies that differences in repayment behavior between the two groups cannot be explained by an effect of forbearance offers on borrowers’ _ability to pay_ . Second, borrowers may prioritize repayments to a lender that granted them a moratorium out of a sense of reciprocity. Such reciprocal behavior could be either entirely altruistic or motivated by strategic considerations. It could be, for instance, that borrowers who are granted repayment flexibility by their lender want to return the favor and prioritize loan repayment to the lender without expectation of any future benefits. Alternatively, borrowers may interpret the offer as an investment in the banking relationship that highlights the importance of maintaining a good repayment record to safeguard the option of doing business with the lender in the future. We refer to this as ‘strategic reciprocity’.

To provide more evidence on these two possible interpretations, we show that loan repayment improves most strongly for borrowers for whom the forbearance offer is immediately valuable. This includes, for instance, borrowers who suffered large income losses, and borrowers who are especially concerned about maintaining a good credit score, and could indicate either strategic or non-strategic reciprocity. Moreover, we present direct survey evidence to explore how borrowers interpret the forbearance offer and its implications for their relationship with the lender. We show that borrowers who received a moratorium offer framed as an initiative of the lender are _more likely_ to believe that the offer was extended only to the _most_ creditworthy borrowers, and that the main rationale for timely loan repayment is the prospect of qualifying for future loans from the lender that extended the forbearance offer. Overall, these results are most consistent with the interpretation that rather than triggering a non-strategic (or purely ’altruistic’) sense of reciprocity, moratorium offers extended by the lender improve repayment because they make the option value of a continued relationship with the lender salient to the borrower.

In the second part of the paper, we examine the implications of forbearance offers for the establishment of longer-term banking relationships, and confirm this interpretation. One striking finding from the main experiment is that borrowers who receive a forbearance offer from their lender are more likely to report that they would like to do business with the lender in the future. This demand for future interaction with the lender could be explained by two different motivations with sharply different implications for the selection into longer term banking relationships. On the one hand, it could be that borrowers interpret forbearance offers from the lender as a signal that it is easier to renegotiate 3