The Ties that Bind: Bank Relationships and Small Business Lending
61 Pages Posted: 2 Dec 2010 Last revised: 18 Aug 2014
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: Suggested Citation
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