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

Howard Bodenhorn ()

Journal of Money, Credit and Banking, 2003, vol. 35, issue 4, 485-505

Abstract: Recent banking theory holds that durable firm-bank relationships are valuable to both parties. This paper uses the contract-specific loan records of a 19th-century U.S. bank and shows that firms with extended relationships received three principal benefits. First, firms with extended relationships had lower credit costs. Second, long-term customers provided fewer personal guarantees, which were an alternative to collateral. Third, long-term customers were more likely to have loan terms renegotiated during a credit crunch. These findings support theories that banks realize cost advantages through the use of proprietary information.

Date: 2003
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Journal of Money, Credit and Banking is currently edited by Robert deYoung, Paul Evans, Pok-Sang Lam and Kenneth D. West

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