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The importance of bank seniority for relationship lending

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

The authors examine two aspects of a bank's interaction with its borrowers--the relative priority of bank debt and the role of banks as "relationship lenders." They show that making the bank senior improves its incentives to build a relationship with the firm, thereby fulfilling an important function of intermediated debt.

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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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  1. James, Christopher, 1988. "The use of loan sales and standby letters of credit by commercial banks," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 395-422.
  2. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
  3. Hart, O. & Moore, J., 1989. "Default And Renegotiation: A Dynamic Model Of Debt," Working papers 520, Massachusetts Institute of Technology (MIT), Department of Economics.
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  5. Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May.
  6. Alan Schwartz, 1997. "Priority Contracts and Priority in Bankruptcy," Yale School of Management Working Papers ysm72, Yale School of Management.
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  8. Boot, Arnoud W A & Thakor, Anjan V, 1994. "Moral Hazard and Secured Lending in an Infinitely Repeated Credit Market Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 899-920, November.
  9. Stanton, Sonya Williams, 1998. "The Underinvestment Problem and Patterns in Bank Lending," Journal of Financial Intermediation, Elsevier, vol. 7(3), pages 293-326, July.
  10. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, June.
  11. Berlin, Mitchell & Mester, Loretta J, 1999. "Deposits and Relationship Lending," Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 579-607.
  12. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  13. Rajan, Raghuram & Winton, Andrew, 1995. " Covenants and Collateral as Incentives to Monitor," Journal of Finance, American Finance Association, vol. 50(4), pages 1113-46, September.
  14. 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.
  15. Stulz, ReneM. & Johnson, Herb, 1985. "An analysis of secured debt," Journal of Financial Economics, Elsevier, vol. 14(4), pages 501-521, December.
  16. 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.
  17. Diamond, Douglas W., 1993. "Seniority and maturity of debt contracts," Journal of Financial Economics, Elsevier, vol. 33(3), pages 341-368, June.
  18. Mitchell Berlin, 1996. "For better and for worse: three lending relationships," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-12.
  19. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
  20. Repullo, R. & Suarez, J., 1996. "Monitoring, Liquidation, and Security Design," Papers 273, Banca Italia - Servizio di Studi.
  21. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  22. 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.
  23. 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.
  24. Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 415-32, July.
  25. Douglas W Diamond, 1992. "Bank Loan Maturity and Priority when Borrowers can Refinance," CEPR Financial Markets Paper 0022, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
  26. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
  27. Berger, Allen N & Udell, Gregory F, 1992. "Some Evidence on the Empirical Significance of Credit Rationing," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 1047-77, October.
  28. Degryse, Hans & Van Cayseele, Patrick, 2000. "Relationship Lending within a Bank-Based System: Evidence from European Small Business Data," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 90-109, January.
  29. Welch, Ivo, 1997. "Why Is Bank Debt Senior? A Theory of Asymmetry and Claim Priority Based on Influence Costs," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1203-36.
  30. Thakor, Anjan V., 2000. "Relationship Banking," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 3-5, January.
  31. Ongena, Steven & Smith, David C., 2000. "What Determines the Number of Bank Relationships? Cross-Country Evidence," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 26-56, January.
  32. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
  33. Fama, Eugene F, 1990. "Contract Costs and Financing Decisions," The Journal of Business, University of Chicago Press, vol. 63(1), pages S71-91, January.
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