Short-Term Loans and Long-Term Relationships: Relationship Lending in Early America

Recent banking theory holds that durable firm–bank relationships are valuable to both parties. This paper uses the contract-specific loan records of a 19th-century U.S. bank and shows that firms with extended relationships received three principal benefits. First, firmswith extended relationships had lower credit costs. Second, long-term customers provided fewer personal guarantees, which were an alternative to collateral. Third, long-term customers were more likely to have loan terms renegotiated during a credit crunch. These findings support theories that banks realize cost advantages through the use of proprietary information.