|M.Sc Student||Paula Simches|
|Subject||Long Term Relationships between Bank and Firm|
|Department||Department of Industrial Engineering and Management||Supervisor||Full Professor Kim Moshe|
This work investigates different aspects of long-term relationships between bank and firm. We can define relationship banking as the provision of financial services by a financial intermediary that invests in obtaining customer specific information, often proprietary in nature. Information gathering takes place over time through multiple interactions with the borrower, often through the provision of multiple financial services, while the information remains confidential. This work reviews analytic and empiric models that shed some light on the importance of close relationships between bank and firm. How we can define them, what the benefits and costs of relationships banking are, to the bank and to the firm.Following some researches that were studied in this work, it was find that close bank-firm relationships are often credited for increasing access to capital and reducing agency costs and collateral requirements.It was found as well that, on one hand, the lone 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 loan ' s interest rate substantially.It was also found that a collateral requirement is decreasing in the duration of the relationship and increasing in its scope.The proprietary information about borrowers that banks obtain as part of their relationships may give them an information monopoly. This way, banks can charge high loan interest rates in the future. The threat of being “Locked in”, or informationally captured by the bank, may make the borrower reluctant to borrow from the bank. Potentially valuable investment opportunities may then be lost. Alternatively, firms may opt for multiple bank relationships. This may reduce the information monopoly of any bank, but possible at a cost. Some researches show that multiple bank relationships indeed reduce the hold-up problem, but worsen the availability of credit. The researchers also found that increased (potential) competition in the financial services industry will not always destroy bank- firm relationships but, on the contrary, may actually strengthen them.