For Better and for Worse: Three Lending Relationships

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For Better and for Worse: Three Lending Relationships

In the article "For Better and for Worse: Three Lending Relationships" by Mitchell Berlin, Berlin discusses the significance of long-term relationships between business borrowers and lenders. He examines how long-term lender-borrower relationships are influenced by competitive conditions in lending markets and by access to alternative sources of financing, such as securities markets, that become available to business borrowers as their size increases. Instructors will find this reading an enlightening extension of Chapter 8's material on financial structure and lending or Chapter 9's discussion of customer relationships as a tool for managing credit risk.

What is the difference between relationship lending and arm's-length lending?
What examples of the use of collateral and restrictive covenants in bank lending does this reading provide? What roles do these play, and how are the restrictive covenants enforced?
Explain the following paradox: The more competition among lenders, the more difficult it will be for young firms to obtain credit and the higher the interest rate they must pay.
What is meant by bank certification and bank monitoring? What phenomena do these concepts help to explain?
How does a firm's ability to sell debt securities affect its bank's willingness to be flexible in renegotiating loan contracts should financial difficulties arise? Why?

Source: "For Better and For Worse: Three Lending Relationships." Timothy Q. Cook and Robert K. LaRoche in Instruments of the Money Market edited by Timothy Q. Cook and Robert K. LaRoche, Federal Reserve Bank of Richmond, 1993, 1-6.

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