Bank Lending and Relationship Banking: Evidence from Chilean Firms

In this paper we empirically study bank-client relationships using a sample of manufacturing Chilean firms. We examine whether concentration and the duration of bank-firm relationships affect the terms of bank financing, evaluating both the volume of bank lending and bank loan costs. Our results indicate that lower concentration, measured by the number of banks a firm borrows from, is associated with lower costs of loans and with a large and positive non-lincar effect on borrowing. The length of borrower-lender relationships, measured by the age of the oldest loan, has a positive effect on the amount borrowed and a negative effect on interest rates paid. When we measure concentration by the number of existing banks (at a geographical level), we find some effects, although of less economic importance.