Long Run Relationships in Banking

This monograph surveys the effects of long-run relationships in banking between corporate borrowers and lenders. The first part of the survey analyzes econometric issues in the measurement of the costs and benefits of such relationships. In particular, we analyze potential issues with commonly used proxies of relationship lending — duration, scope and intensity. This analysis, as well as studies that have access to internal bank records, suggest that intensity (fraction of the total lending of a borrower by a given bank) would be a better measure of relationship lending, relative to duration. This analysis also suggests that accounting for endogeneity of relationships and simultaneity of loan contract terms does not qualitatively impact the results of earlier literature. Papers with the ability to circumvent several of the econometric issues are discussed in detail. The second part of this monograph is similar to a standard review where papers relating to hold-up costs, multiple banking relationships, impact of competition on relationship banking, and measurement of soft information in banking are covered.