Banks and the Role of Lending Relationships: Evidence from the U.S. Experience

One characteristic which may distinguish banks from other financial institutions is the role of relationships between the bank and its borrowers. These firm-lender relationships can help resolve market failures and thus provide a role for banks. This paper describes the theoretical role of lending relationships in financial markets. Relationships can generate useful information as well as be used to constrain borrowers. Empirically, relationships appear to have the greatest effect on the provision of credit opposed to the price at which firms are able to borrow. Finally the paper examines current changes in financial markets and their impact on the durability of lending relationships as well as their continued role in modern financial markets. The views expressed in this paper are those of the authors. The author wishes to acknowledge the helpful suggestions and comments of Paola Sapienza and participants in the “Credit Systems and Small and Medium Sized Firms” conference.