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Short-Term Loans and Long-Term Relationships: Relationship Lending in Early America

  • Howard Bodenhorn

Recent banking theory holds that durable firm-bank relationships are valuable to both parties. Using contract-specific loan records of a nineteenth-century U.S. bank, this paper shows that firms that form extended relationships with banks receive three principal benefits. First, firms with extended relationships face lower credit costs. As the bank-borrower relationship matures credit costs decline. Second, long-term customers are asked to provide fewer personal guarantees. Third-party guarantees are an efficient alternative to collateral in certain circumstances, and long-term clients are asked to provide fewer guarantees. Third, long-term bank customers more likely to have loan terms renegotiated during a credit crunch. Firms without access to public debt markets rely on bank credit, and continued access during a credit crunch is important for small, informationally opaque firms.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Historical Working Papers with number 0137.

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Date of creation: Dec 2001
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Publication status: published as Bodenhorn, Howard. "Short-Term Loans And Long-Term Relationships: Relationship Lending In Early America," Journal of Money, Credit and Banking, 2003, v35(4,Aug), 485-505.
Handle: RePEc:nbr:nberhi:0137
Note: DAE
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