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

Author

Listed:
  • 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
    Note: DAE
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    References listed on IDEAS

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    JEL classification:

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

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