Common use of Relationship Characteristics Clause in Contracts

Relationship Characteristics. Relationship characteristics control for information and experience effects and are therefore central to our analysis. The first characteristic in this category, Main Bank, indicates whether this bank considers itself to be the main bank of that firm or not. The definition used by the bank to determine whether it is the main bank is “having a monthly ‘turnover’ on the current account of at least BEF 100,000 (U.S. Dollar 2,500),38 and buying at least two products from that bank”. More than half of all borrowers are classified as Main Bank customers. Main Bank captures the scope of the relationship (that is, whether this firm also buys other products from this bank and executes most of its payments via this bank). If these sources of information improve the accuracy of the bank’s information or reduce the monitoring costs, then the measure Main Bank should reduce the expected cost of such loans.39 But Main Bank also proxies for the exclusivity of the relationship and the resulting lack of information a borrower has about alternatives.40 In that case, a main bank customer will pay a higher loan rate. The second relationship variable is the Duration of the Relationship in years with that particular bank at the time the loan rate is decided upon. A relationship starts when a firm buys for the first time a product from that bank. The average duration of the relationship in the sample is about eight years. Duration proxies for the increased time for a firm to experience the banks’ products and to appreciate the added flexibility the bank has to maintain and fulfill implicit contracts. While the bank gains private information about a firm to tailor its products, the firm may also become locked-in. In that case, a long-term bank customer may end up paying a higher loan rate.