The Value of Lending Relationships

This figure presents the mean and 95% confidence interval for two different capital ratios during our sample period.

Various factors lead lenders to value one borrower relationship more than another, which could matter when lenders make forbearance decisions during periods of financial instability. In a downturn, lenders may be forced to prioritize borrowers they value more over borrowers they value less (Working Paper no. 24-02).


Lending relationships constitute a potentially important driver of bank value, but the quantitative significance of this intangible capital is unknown. To estimate the value of relationships, we model the lender’s decision to enforce a contractual breach of predetermined covenant thresholds based on a tradeoff between the cost of potential relationship termination and the benefits of increased fees and reduced risk. The implied value of a relationship to the lender is 11.6% of loan principal, on average, and is higher for opaque borrowers with fewer outside options. Relationship value averages 6.6% of bank assets and is positively associated with bank value.

Keywords: syndicated lending, financial covenants, lending relationships, intangible capital
JEL Classifications: G21, G32, K12, L14, E32, E44

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