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The importance of bank seniority for relationship lending

Author

Listed:
  • João A. C. Santos

    (Federal Reserve Bank of New York)

  • Stanley D. Longhofer

    (Wichita State University - W. Frank Barton School of Business)

Abstract
This paper brings together two seemingly unrelated branches of the literature that focuses on different aspects of a bank's interaction with its borrowers: the relative priority of bank debt, and the role of banks as "relationship lenders". Specifically, we show that bank seniority plays an important role in encouraging the formation of ongoing bank/firm relationships. Because the bank is senior, it is more able to reap the benefits from its relationship with the firm; because the firm has a relationship with a bank, it is more willing to exert effort, thus reducing the impact of a recession on its prospects. As a result, the firm's ex ante value is enhanced when the bank's debt is senior to that of the firm's other creditors.

Suggested Citation

  • João A. C. Santos & Stanley D. Longhofer, 1998. "The importance of bank seniority for relationship lending," BIS Working Papers 58, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:58
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    References listed on IDEAS

    as
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