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The ties that bind: Bank relationships and small business lending

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  • Santikian, Lori

Abstract

The importance of bank relationships for small firms’ ability to raise external finance is well-documented, yet the mechanism through which relationships improve access to capital markets has received little empirical attention. This paper uses hand-collected, proprietary data from a mid-sized bank in the United States to identify the channels that strengthen the relationship between a small business and its bank. In contrast to earlier work that focuses on the role of relationships in alleviating information and incentive problems in lending, I find that the source of value in relationship banking is not limited to enhanced monitoring. Exploiting a unique feature of this dataset, I examine two channels of relationship strength that directly measure the stream of non-lending profits generated from (1) the non-credit services cross-sold to the borrower, and (2) the additional bank clients referred by the borrower. I document that non-lending profitability empirically determines the risk-adjusted terms of lending. In models of loan price that already include both the bank’s proprietary risk rating and traditional risk proxies, non-lending profits significantly improve explanatory power and account for up to half of the total explained variation. Conditional on risk profile, a one-standard deviation increase in aggregate non-lending profits lowers the loan interest rate by 32 basis points and increases access to credit by 26%.

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  • Santikian, Lori, 2014. "The ties that bind: Bank relationships and small business lending," Journal of Financial Intermediation, Elsevier, vol. 23(2), pages 177-213.
  • Handle: RePEc:eee:jfinin:v:23:y:2014:i:2:p:177-213
    DOI: 10.1016/j.jfi.2013.11.004
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