For Better and for Worse: Three Lending Relationships

Mitchell Berlin

Vice President and Economist

November/December 1996

Business Review — When bankers speak of building a relationship with a business customer these days, they usually mean selling the customer a whole range of financial products such as lock-boxes, letters of credit, and swaps, in addition to loans.

When financial economists speak of relationship lending between banks and firms, they usually have a different, more old-fashioned idea in mind. They mean a close relationship between a firm and its banker, in which a single banker has intimate knowledge about the firm’s affairs, built up over years of lending. Economists distinguish this type of lending from the more anonymous arm’s-length lending, in which institutions and individuals provide funds to firms by purchasing their public securities (stocks and bonds).

This article appeared in the November/December 1996 edition of Business Review.

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