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Title: 

So What Do I Get? The Bank’s View of Lending Relationships

Authors: Bharath, Sreedhar
Dahiya, Sandeep
Saunders, Anthony
Srinivasan, Anand
Issue Date: 2004
Series/Report no.: S-FI-04-10
Abstract: While a number of empirical studies have documented benefits of lending relationships to borrowers (lower loan rates, better credit availability, etc.), not much is known about benefits of such relationships for lenders. For a relationship lender, its comparative advantage in information gathering/processing yields two potential benefits. First, a relationship lender would have a higher probability of selling future information-sensitive products (e.g. loans, security underwriting, etc.) to its borrowers compared to a non-relationship lender. We refer to this as higher volume benefit of relationship lending. Second, if borrower-specific information is only available to relationship lender, it can use this information monopoly to charge higher rates on future loans. We refer to this as increased pricing benefit of relationship lending. Our results show that, on average, a lender with a past relationship with a borrower has a 42% probability of providing it with future loans, while a lender lacking a past relationship with a borrower has only a 3% probability of providing it with a future loan. Consistent with theory, we find that borrowers with greater information asymmetries (e.g. small borrowers, or non-rated borrowers) are significantly more likely to use their relationship banks for future loans. Although the association between past lending relationship and probability of being chosen to provide debt and equity underwriting services in the future is statistically significant, the economic impact is much smaller compared to loan markets. However, our findings do not provide strong support for an increased pricing benefit for relationship lenders. On average, the rate of interest for similar borrowers is 6-10 basis points lower if the loan is provided by a relationship lender. Underwriting fee for initial public offerings (IPO) with relationship lender(s) as lead underwriter(s) is 26 basis points lower. This suggests that lenders are prepared to share some of the benefits of relationship lending with borrowers.
URI: http://hdl.handle.net/2451/26999
Appears in Collections:Financial Institutions

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