Relationship lending within a bank-based system: Evidence from European small business data

We investigate relationship lending using detailed contract information fro m nearly 18,000 bank loans to small Belgian firms operating within the cont inental European bank-based system. Specifically, we investigate die impact of different measures of relationship strength on price and nonprice terms of the loan contract. We test for the possibility of rent shifting by bank s. The evidence shows two opposing effects. On the one hand, the loan rate increases with the duration of a bank-firm relationship. On the other hand, the scope of a relationship, defined as the purchase of other information- sensitive products from a bank, decreases the loin's interest rate substant ially. Relationship duration and scope thus have opposite effects on loan r ates, with the latter being more important. We also find that the collatera l requirement is decreasing in the duration of the relationship and increas ing in its scope. Journal of Economic Literature Classification Numbers: G2 1, G32. (C) 2000 by Academic Press.