The Ties that Bind: Bank Relationships and Small Business Lending

61 Pages Posted: 2 Dec 2010 Last revised: 18 Aug 2014

See all articles by Lori Santikian

Lori Santikian

USC Marshall School of Business

Date Written: November 10, 2011

Abstract

In contrast to standard theory that predicts only risk-based determinants for the price of credit, I find that non-lending profitability shapes the risk-adjusted terms of lending to small businesses. Using hand-collected, proprietary data from a mid-sized bank in the United States, I directly measure the stream of non-lending profits generated from (1) the non-credit services cross-sold to the borrower, and (2) the additional bank clients referred by the borrower. In models of loan price that already include both the bank’s proprietary risk rating and traditional risk proxies, non-lending profits increase adjusted R2’s by 13 to 16 percentage points (from a base of 14 to 26 percentage points), and account for 28 to 54 percent of the total explained variation. Conditional on risk profile, a one-standard deviation increase in aggregate non-lending profits lowers the loan interest rate by 32 basis points and increases access to credit by 26 percent.

Keywords: bank debt, relationship banking, entrepreneurship, small business lending

JEL Classification: G21, G30

Suggested Citation

Santikian, Lori, The Ties that Bind: Bank Relationships and Small Business Lending (November 10, 2011). AFA 2011 Denver Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1718105 or http://dx.doi.org/10.2139/ssrn.1718105

Lori Santikian (Contact Author)

USC Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~santikia/

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