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

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  • Howard Bodenhorn

Abstract

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.

Suggested Citation

  • Howard Bodenhorn, 2001. "Short-Term Loans and Long-Term Relationships: Relationship Lending in Early America," NBER Historical Working Papers 0137, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberhi:0137
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    Cited by:

    1. Ardic, Oya Pinar & Mylenko, Nataliya & Saltane, Valentina, 2011. "Small and medium enterprises : a cross-country analysis with a new data set," Policy Research Working Paper Series 5538, The World Bank.
    2. Eugene Kang & Asghar Zardkoohi & Ramona Paetzold & Donald Fraser, 2013. "Relationship banking and escalating commitments to bad loans," Small Business Economics, Springer, vol. 40(4), pages 899-910, May.
    3. Lionel Artige & Rosella Nicolini, 2008. "Memory in Contracts: The Experience of the EBRD (1991-2003)," UFAE and IAE Working Papers 724.08, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    4. Bartz, Wiebke & Winkler, Adalbert, 2016. "Flexible or fragile? The growth performance of small and young businesses during the global financial crisis — Evidence from Germany," Journal of Business Venturing, Elsevier, vol. 31(2), pages 196-215.
    5. Brick, Ivan E. & Palia, Darius, 2007. "Evidence of jointness in the terms of relationship lending," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 452-476, July.
    6. Ono, Arito & Hasumi, Ryo & Hirata, Hideaki, 2014. "Differentiated use of small business credit scoring by relationship lenders and transactional lenders: Evidence from firm–bank matched data in Japan," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 371-380.
    7. Howard Bodenhorn, 2016. "Two Centuries of Finance and Growth in the United States, 1790-1980," Working Papers id:11352, eSocialSciences.
    8. Gómez-González, José Eduardo & Reyes, Nidia Ruth, 2011. "The number of banking relationships and the business cycle: New evidence from Colombia," Economic Systems, Elsevier, vol. 35(3), pages 408-418, September.
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    10. Behr, Patrick & Entzian, Annekathrin & Güttler, Andre, 2011. "How do lending relationships affect access to credit and loan conditions in microlending?," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2169-2178, August.
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    12. Ginés Hernández Cánovas & Pedro Martínez Solano, 2003. "Relaciones Bancarias Y Sus Efectos Sobre Los Términos De La Deuda En Las Pymes," Working Papers. Serie EC 2003-07, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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    16. Djedidi-Kooli, Salima, 2009. "L’accès au financement des PME en France : quel rôle joué par la structure du système bancaire ?," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8354 edited by Etner, François.
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    20. Andreas Dietrich, 2012. "Explaining loan rate differentials between small and large companies: evidence from Switzerland," Small Business Economics, Springer, vol. 38(4), pages 481-494, May.
    21. Howard Bodenhorn, 2005. "Usury Ceilings, Relationships and Bank Lending Behavior: Evidence from Nineteenth Century," NBER Working Papers 11734, National Bureau of Economic Research, Inc.
    22. Chi, Li-Chiu, 2009. "How have banks fared following a borrower's financial distress?," Economic Modelling, Elsevier, vol. 26(2), pages 480-488, March.
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    JEL classification:

    • N2 - Economic History - - Financial Markets and Institutions
    • G2 - Financial Economics - - Financial Institutions and Services

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