This paper analyzes how lending relationships affect firms' incentives to default, using loan-level data from Spain. It provides new evidence that firms prioritize debt repayment to their most important (“non-main”) banks to preserve valuable lending relationships. Banks also adjust their credit risk management by recognizing lower discretionary loan impairments for firms with important banks. Results are robust to alternative difference-in-differences (DID) analyses and control for bank forbearance, loan characteristics, and time-varying bank and firm fixed effects. The study finds that firms with more important banks in their lending relationships are less likely to default on loans from those banks. This is consistent with the idea that firms prioritize repayment to maintain key relationships. The results also show that microenterprises prioritize repayment to their most important banks more than larger firms, reflecting greater information asymmetries. Banks internalize borrower incentives to default in their recognition of discretionary loan impairments. Main banks recognize lower impairments than less important banks, especially for small and young firms. These findings suggest that lending relationships have a "shadow seniority" effect, where main banks have priority in loan recovery. The paper highlights the importance of lending relationships in credit risk modeling, showing that they can reduce default rates and influence credit risk assessments. The results suggest that banks should explicitly consider lending relationships when estimating default probabilities. The study uses a detailed dataset of Spanish firms and loans, focusing on firms with multiple lending relationships to control for unobserved heterogeneity. The analysis includes both delinquent and unlikely-to-pay (UTP) loans, with a focus on delinquent loans to capture borrower incentives. The results are robust across various specifications and control for bank and firm characteristics. The study also tests the effect of bank acquisitions on lending relationships, finding that increased importance of the acquirer as a lender leads to higher repayment priorities from borrowers. Overall, the findings emphasize the role of lending relationships in shaping borrower behavior and credit risk management.This paper analyzes how lending relationships affect firms' incentives to default, using loan-level data from Spain. It provides new evidence that firms prioritize debt repayment to their most important (“non-main”) banks to preserve valuable lending relationships. Banks also adjust their credit risk management by recognizing lower discretionary loan impairments for firms with important banks. Results are robust to alternative difference-in-differences (DID) analyses and control for bank forbearance, loan characteristics, and time-varying bank and firm fixed effects. The study finds that firms with more important banks in their lending relationships are less likely to default on loans from those banks. This is consistent with the idea that firms prioritize repayment to maintain key relationships. The results also show that microenterprises prioritize repayment to their most important banks more than larger firms, reflecting greater information asymmetries. Banks internalize borrower incentives to default in their recognition of discretionary loan impairments. Main banks recognize lower impairments than less important banks, especially for small and young firms. These findings suggest that lending relationships have a "shadow seniority" effect, where main banks have priority in loan recovery. The paper highlights the importance of lending relationships in credit risk modeling, showing that they can reduce default rates and influence credit risk assessments. The results suggest that banks should explicitly consider lending relationships when estimating default probabilities. The study uses a detailed dataset of Spanish firms and loans, focusing on firms with multiple lending relationships to control for unobserved heterogeneity. The analysis includes both delinquent and unlikely-to-pay (UTP) loans, with a focus on delinquent loans to capture borrower incentives. The results are robust across various specifications and control for bank and firm characteristics. The study also tests the effect of bank acquisitions on lending relationships, finding that increased importance of the acquirer as a lender leads to higher repayment priorities from borrowers. Overall, the findings emphasize the role of lending relationships in shaping borrower behavior and credit risk management.