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Relationship Banking and the Pricing of Financial Services

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  • Charles Calomiris
  • Thanavut Pornrojnangkool

Abstract

We investigate how banking relationships that combine lending and underwriting services affect the terms of lending, through both loan supply- and loan demand-side effects, and the underwriting costs of debt and equity issues. We capture and control for firm characteristics, including differences in the sequences of firm financing decisions (which we argue are likely to capture important cross-sectional heterogeneity, and which previously have been ignored in the literature). We construct a structural model of lending, which separately identifies loan supply and loan demand. Our approach results in significant improvement in the explanatory power of our regressions when compared to prior studies. We find no evidence that universal banks under-price loans to win underwriting business. Instead, we find that universal banks charge premiums for loans and underwriting services to extract value from combined lending and underwriting relationships. We also find that universal banks (as opposed to stand alone investment banks) enjoy cost advantages in both lending and underwriting, irrespective of relationship benefits. Part of the advantage borrowers may enjoy from bundling products may be a form of liquidity risk insurance, which is manifested in a reduced demand for lines of credit. We also find evidence of a “road show� effect; firms that engage in debt underwritings enjoy loan pricing discounts on the loans that are negotiated at times close to the debt underwritings.

Suggested Citation

  • Charles Calomiris & Thanavut Pornrojnangkool, 2006. "Relationship Banking and the Pricing of Financial Services," NBER Working Papers 12622, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12622
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    Cited by:

    1. Gabriel Jiménez & Steven Ongena & José‐Luis Peydró & Jesús Saurina, 2014. "Hazardous Times for Monetary Policy: What Do Twenty‐Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk‐Taking?," Econometrica, Econometric Society, vol. 82(2), pages 463-505, March.
    2. Richard W. Evans, 2012. "Determinants of Short-term Consumer Lending Interest Rates," BYU Macroeconomics and Computational Laboratory Working Paper Series 2012-07, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
    3. Berger, Allen N. & Makaew, Tanakorn & Roman, Raluca, 2015. "Did bank borrowers benefit from the TARP program : the effects of TARP on loan contract terms," Research Working Paper RWP 15-11, Federal Reserve Bank of Kansas City.
    4. Taylor Canann & Richard Evans, 2015. "Determinants of Short-term Lender Location and Interest Rates," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(3), pages 235-262, December.
    5. repec:spr:schmbr:v:18:y:2017:i:3:d:10.1007_s41464-017-0038-7 is not listed on IDEAS
    6. Yan-Shing Chen & Chung-Hua Shen & Chih-Yung Lin, 2014. "The Benefits of Political Connection: Evidence from Individual Bank-Loan Contracts," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(3), pages 287-305, June.
    7. Steven Ongena & Yuejuan Yu, 2017. "Firm Industry Affiliation and Multiple Bank Relationships," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(1), pages 1-17, February.
    8. Yu, Y., 2014. "Essays on relationship banking," Other publications TiSEM f3d56b9e-e79e-46c4-bd42-4, Tilburg University, School of Economics and Management.
    9. Antonio Gledson de Carvalho & Joao Amaro de Matos & Douglas Beserra Pinheiro & Marcio de Sa Mello, 2015. "Conflicts of Interest in the Underwriting of IPOs and Price Stabilization," FEUNL Working Paper Series wp596, Universidade Nova de Lisboa, Faculdade de Economia.
    10. Calum Turvey & Xiaolan Xu & Rong Kong & Ying Cao, 2014. "Attitudinal Asymmetries and the Lender-Borrower Relationship: Survey Results on Farm Lending in Shandong, China," Journal of Financial Services Research, Springer;Western Finance Association, vol. 46(2), pages 115-135, October.
    11. Bouwman, Christa H. S., 2013. "Liquidity: How Banks Create It and How It Should Be Regulated," Working Papers 13-32, University of Pennsylvania, Wharton School, Weiss Center.
    12. Christoph Basten & Catherine Koch, 2014. "Higher bank capital requirements and mortgage pricing: evidence from the Counter-Cyclical Capital Buffer," ECON - Working Papers 169, Department of Economics - University of Zurich.
    13. Franco Fiordelisi & Stefano Monferrà & Gabriele Sampagnaro, 2014. "Relationship Lending and Credit Quality," Journal of Financial Services Research, Springer;Western Finance Association, vol. 46(3), pages 295-315, December.
    14. Charles W. Calomiris, 2006. "The Regulatory Record of the Greenspan Fed," American Economic Review, American Economic Association, vol. 96(2), pages 170-173, May.
    15. Zhao, Tianshu & Matthews, Kent & Murinde, Victor, 2013. "Cross-selling, switching costs and imperfect competition in British banks," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5452-5462.
    16. repec:eee:jfinec:v:128:y:2018:i:1:p:66-85 is not listed on IDEAS

    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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