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The importance of bank seniority for relationship lending

  • Stanley D. Longhofer
  • João A. C. Santos

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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Paper provided by Federal Reserve Bank of Chicago in its series Proceedings with number 620.

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Length: 177-205
Date of creation: 1999
Date of revision:
Publication status: Published in Conference on Bank Structure and Competition (1999 : 35th) ; Global financial crisis : implications for banking and regulation
Handle: RePEc:fip:fedhpr:620
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