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Relationship Banking and the Pricing of Financial Services


Charles W. Calomiris


Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Thanavut Pornrojnangkool


World Bank

October 2006

NBER Working Paper No. w12622

Abstract:     
We investigate how banking relationships that combine lending and underwriting services affect the terms of lending, through both loan supply- and loan demand-side effects, and the underwriting costs of debt and equity issues. We capture and control for firm characteristics, including differences in the sequences of firm financing decisions (which we argue are likely to capture important cross-sectional heterogeneity, and which previously have been ignored in the literature). We construct a structural model of lending, which separately identifies loan supply and loan demand. Our approach results in significant improvement in the explanatory power of our regressions when compared to prior studies. We find no evidence that universal banks under-price loans to win underwriting business. Instead, we find that universal banks charge premiums for loans and underwriting services to extract value from combined lending and underwriting relationships. We also find that universal banks (as opposed to stand alone investment banks) enjoy cost advantages in both lending and underwriting, irrespective of relationship benefits. Part of the advantage borrowers may enjoy from bundling products may be a form of liquidity risk insurance, which is manifested in a reduced demand for lines of credit. We also find evidence of a “road show� effect; firms that engage in debt underwritings enjoy loan pricing discounts on the loans that are negotiated at times close to the debt underwritings.

Number of Pages in PDF File: 73

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Date posted: October 27, 2006  

Suggested Citation

Calomiris, Charles W. and Pornrojnangkool, Thanavut, Relationship Banking and the Pricing of Financial Services (October 2006). NBER Working Paper No. w12622. Available at SSRN: http://ssrn.com/abstract=938415

Contact Information

Charles W. Calomiris (Contact Author)
Columbia University - Columbia Business School ( email )
3022 Broadway
601 Uris, Dept. of Finance & Economics
New York, NY 10027
United States
212-854-8748 (Phone)
212-316-9219 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Thanavut Pornrojnangkool
World Bank ( email )
1818 H Street, N.W.
Washington, DC 20433
United States
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