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

While the concept of customer lending relationships in banking has generated a great deal of recent attention, one gap in the empirical literature is that linking current lending business and the sale of “other products”. Specifically, does establishing a lending relationship today add value for the bank by increasing the probability of attracting future business from the same customer? Indeed, many bankers view the generation of additional business as the principal reason for engaging in relationship lending. Our results show that a lender that has a strong relationship with a borrower has far greater odds of providing it with future loans compared to a lender lacking such a relationship. Existence of lending relationships are also strongly associated with an increased probability of winning future debt underwriting business from the same customer. Prior lending relationships also translate into a higher likelihood of a winning a co-manager role on equity underwritings. While loans to relationship borrowers have a 10-16 basis points lower interest rate, the fees on investment banking services tend to be up to 14% higher. In sum, we document direct and measurable evidence of the value of relationships to lenders. ∗Bharath is with University of Michigan, Dahiya is with Georgetown University, Saunders is with New York University, and Srinivasan is with University of Georgia. Dahiya acknowledges the support provided by Lee Higdon, Jr. Faculty Research Fellowship provided by McDonough School of Business. This paper has benefited greatly from suggestions and comments from seminar participants at University of Michigan and American University. Please address all correspondence to Anthony Saunders, Stern School of Business, New York University, New York 10012. Tel: 212 998 0711. Fax:212 995 4232. Email:[email protected]