NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Howard Bodenhorn

NBER Historical Working Paper No. 137
Issued in December 2001
NBER Program(s):   DAE

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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Document Object Identifier (DOI): 10.3386/h0137

Published: 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.

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