This theoretical paper extends the pioneering articles
on relationship lending (e.g., Sharpe 1990; Rajan 1992; von Thadden 2004) by
examining relationship lending and hold-up problems in credit markets when
borrowers are identical and banks are different. The results show that existing
borrowers are informationally captured by good banks and yield profits to them,
but new borrowers are unprofitable. In this market, short-term loan contracts and
unsecured loans are optimal while loan commitments should not be used. Further,
banks and borrowers have long-term relationships. This paper challenges the standard
theories on product quality, reputation and experience goods by introducing scenarios
in which good and bad banks can retain their existing borrowers. In the standard
theories, consumers leave bad producers and search for good ones.