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The importance of bank seniority for relationship lending

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Author Info
João A. C. Santos (Federal Reserve Bank of New York)
Stanley D. Longhofer (Wichita State University - W. Frank Barton School of Business)

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Abstract

This paper brings together two seemingly unrelated branches of the literature that focuses on different aspects of a bank's interaction with its borrowers: the relative priority of bank debt, and the role of banks as "relationship lenders". Specifically, we show that bank seniority plays an important role in encouraging the formation of ongoing bank/firm relationships. Because the bank is senior, it is more able to reap the benefits from its relationship with the firm; because the firm has a relationship with a bank, it is more willing to exert effort, thus reducing the impact of a recession on its prospects. As a result, the firm's ex ante value is enhanced when the bank's debt is senior to that of the firm's other creditors.

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Publisher Info
Paper provided by Bank for International Settlements in its series BIS Working Papers with number 58.

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Length: 37 pages
Date of creation: Nov 1998
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Handle: RePEc:bis:biswps:58

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. " The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, vol. 48(1), pages 247-66, March. [Downloadable!] (restricted)
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  6. Alan Schwartz, 1997. "Priority Contracts and Priority in Bankruptcy," Yale School of Management Working Papers ysm72, Yale School of Management. [Downloadable!]
  7. Berglof, Erik & von Thadden, Ernst-Ludwig, 1994. "Short-Term versus Long-Term Interests: Capital Structure with Multiple Investors," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1055-84, November. [Downloadable!] (restricted)
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    Other versions:
  14. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May. [Downloadable!] (restricted)
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  15. Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, vol. 55(2), pages 679-713, 04. [Downloadable!] (restricted)
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  16. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March. [Downloadable!] (restricted)
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  24. Thakor, Anjan V., 2000. "Relationship Banking," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 3-5, January. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Krahnen, Jan Pieter, 2000. "Collateral, Default Risk, and Relationship Lending: An Empirical Study on Financial Contracting," CEPR Discussion Papers 2540, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Doris Neuberger, 2005. "What’s Common to Relationship Banking and Relationship Investing? Reflections within the Contractual Theory of the Firm," Finance 0503001, EconWPA. [Downloadable!]
  3. Eirik Gaard Kristiansen, 2005. "Strategic bank monitoring and firms’ debt structure," Working Paper 2005/10, Norges Bank. [Downloadable!]
  4. Xavier Freixas, 2005. "Deconstructing relationship banking," Investigaciones Economicas, Fundación SEPI, vol. 29(1), pages 3-31, January. [Downloadable!]
  5. Pozzolo, Alberto Franco, 2004. "The Role of Guarantees in Bank Lending," Economics & Statistics Discussion Papers esdp04021, University of Molise, Dept. SEGeS. [Downloadable!]
    Other versions:
  6. Ozgur Emre Ergungor, 2000. "Relationship loans and information exploitability in a competitive market: loan commitments vs. spot loans," Working Paper 0013, Federal Reserve Bank of Cleveland. [Downloadable!]
  7. Lukas Menkhoff & Doris Neuberger & Chodechai Suwanaporn, 2005. "Collateral-Based Lending in Emerging Markets: Evidence from Thailand," Finance 0501008, EconWPA. [Downloadable!]
    Other versions:
  8. L. Baele & R. Vander Vennet & A. Van Landschoot, 2004. "Bank Risk Strategies and Cyclical Variation in Bank Stock Returns," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/217, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
  9. Mitchell Berlin & Alexander Butler, 2002. "Collateral and competition," Working Papers 02-22, Federal Reserve Bank of Philadelphia. [Downloadable!]
  10. Brunner, Antje & Krahnen, Jan Pieter, 2004. "Multiple Lenders and Corporate Distress: Evidence on Debt Restructuring," CEPR Discussion Papers 4287, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  11. Allen N. Berger & Leora F. Klapper & Gregory F. Udell, 2001. "The ability of banks to lend to informationally opaque small businesses," Finance and Economics Discussion Series 2001-34, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  12. John Armour, 2006. "Should we redistribute in insolvency," ESRC Centre for Business Research - Working Papers wp319, ESRC Centre for Business Research. [Downloadable!]
  13. Filippo Ippolito, 2005. "Convertible Preferred Stock in Venture Capital Financing," OFRC Working Papers Series 2005fe12, Oxford Financial Research Centre. [Downloadable!]
  14. Hans Degryse & Steven Ongena, 2002. "Bank-Firm Relationships and International Banking Markets," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 9(3), pages 401-417, November. [Downloadable!] (restricted)
  15. Annalisa Castelli & Gerald P. Dwyer, Jr. & Iftekhar Hasan, 2006. "Bank relationships and small firms’ financial performance," Working Paper 2006-05, Federal Reserve Bank of Atlanta. [Downloadable!]
  16. Jose Maria Liberti, 2004. "Initiative, Incentives and Soft Information. How Does Delegation Impact The Role of Bank Relationship Managers?," Finance 0404023, EconWPA. [Downloadable!]
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