Relationship Lending within a Bank-based System: Evidence from European Small Business Data

This paper adds to the relationship lending debate by investigating detailed contract information obtained from examining nearly eighteen thousand bank loans. The beneficiaries all were very small firms that operate within the continental European bank-based system. That is, with data gathered for Belgium, we investigate price and non-price terms of the loan contract. We test for the possibility of intertemporal rent shifting by banks. The empirical evidence shows two opposing effects. On the one hand, the length of a bank-firm relationship increases the loan rate. On the other hand, widening the relationship by buying other information sensitive products from a bank decreases the loan rate. Thus the effect on the price operates more through the dimension of the relationship than through the length of the relationship. We also find that the length of the financial relationship slightly negatively influences the probability of pledging collateral.