Relationship Characteristics Clause Samples
Relationship Characteristics. We now report the empirical results concerning the role of relationships. The impact of the bank-firm relationship is captured in two complementary ways. Our first indicator of relationship strength, Main Bank, measures the scope of the bank-firm relationship. The loan rate decreases with the scope of the relationship. The results show that a firm pays 41 basis points less when the scope of a relationship is sufficiently broad (Main Bank = 1).50 The second indicator is the Duration of the Relationship between the lending bank and the borrower. We take the log of (one plus) the Duration of the Relationship, as we expect the marginal impact on the loan rate to decrease with the duration of the financial relationship. Table 6 shows that the loan rate increases with the duration of the relationship. This result was also documented and discussed in Degryse and ▇▇▇ ▇▇▇▇▇▇▇▇ (2000). For example, an increase in duration from the median (7.5 years) to the median plus one standard deviation (13 years) increases the loan rate by 10 basis points.
Relationship Characteristics. Relationship characteristics control for information and experience effects and are therefore central to our analysis. The first characteristic in this category, Main Bank, indicates whether this bank considers itself to be the main bank of that firm or not. The definition used by the bank to determine whether it is the main bank is “having a monthly ‘turnover’ on the current account of at least BEF 100,000 (U.S. Dollar 2,500),38 and buying at least two products from that bank”. More than half of all borrowers are classified as Main Bank customers. Main Bank captures the scope of the relationship (that is, whether this firm also buys other products from this bank and executes most of its payments via this bank). If these sources of information improve the accuracy of the bank’s information or reduce the monitoring costs, then the measure Main Bank should reduce the expected cost of such loans.39 But Main Bank also proxies for the exclusivity of the relationship and the resulting lack of information a borrower has about alternatives.40 In that case, a main bank customer will pay a higher loan rate. The second relationship variable is the Duration of the Relationship in years with that particular bank at the time the loan rate is decided upon. A relationship starts when a firm buys for the first time a product from that bank. The average duration of the relationship in the sample is about eight years. Duration proxies for the increased time for a firm to experience the banks’ products and to appreciate the added flexibility the bank has to maintain and fulfill implicit contracts. While the bank gains private information about a firm to tailor its products, the firm may also become locked-in. In that case, a long-term bank customer may end up paying a higher loan rate.