Do Lending Relationships Matter? Evidence from Bank Survey Data in Germany

Abstract

Strong lending relationships between banks and small and medium-sized enterprises (SMEs) play a key role in the bank-based financial system of Germany. So far, they have been mainly described by the notion of a housebank and transactional features of long-term bank-customer relationships. In contrast, the present paper also considers interactional variables which try to measure social relations between loan officer and firm manager. Using bank survey data, the relationship and interaction variables prove to affect loan prices, collateral requirements and credit availability.

The role of demographics in small business loan pricing

“…Regression II shows the influence of firm-specific variables. The age of the firm has no significant influence, which confirms the results of Lehmann and Neuberger (2001) and Berger and Udell (1995). In contrast to most of the previous studies, larger firms pay higher loan rates.…”

“…Lehmann and Neuberger (2001) found a negative influence of human capital, measured by management skill on loan rates. Firms located in peripheral or poor regions such as East Germany (Harhoff and Körting, 1998;Lehmann and Neuberger, 2001) or Southern Italy (D'Auria et al, 1999) pay significantly higher loan rates than firms located in economically prosperous regions such as West Germany or Northern Italy.…”

“…Lehmann and Neuberger (2001) found a negative influence of human capital, measured by management skill on loan rates. Firms located in peripheral or poor regions such as East Germany (Harhoff and Körting, 1998;Lehmann and Neuberger, 2001) or Southern Italy (D'Auria et al, 1999) pay significantly higher loan rates than firms located in economically prosperous regions such as West Germany or Northern Italy. Harhoff and Körting (1998) found that firms in city counties pay higher interest rates than those in fringe or rural ones, which is consistent with the result of Petersen and Rajan (1995) that in more concentrated banking markets, availability of external finance increases.…”

“…Some studies found a negative influence of relationship lending, measured by the duration of the lending relationship (Berger and Udell, 1995), a small number of lenders or main bank relationship (Petersen and Rajan, 1994;Degryse and Ongena, 2005;Stein, 2011), stability (Harhoff and Körting, 1998), or mutual trust (Lehmann and Neuberger, 2001; Hernandez-Canovas und Martinez-Solano, 2010), on loan rates. Hernandez-Canovas und Martinez-Solano (2010) found that firms with a long-term lending relationship have better access to credit, but have to pay higher loan rates, consistent with the hold-up hypothesis.…”

Relationship Lending and Credit Quality

“…Similarly, Chakraborty and Hu (2006) find that the incidence of collateral pledge decreases with the number of lender-provided financial services used by the borrower. By contrast, other studies (Machauer and Weber 1998, Degryse and Van Cayseele 2000, Elsas and Krahnen 2002, Lehmann and Neuberger 2001, and Menkhoff et al 2006, Ono and Uesugi 2009) find that collateral is contract-term prevalent into the relationship between the borrowers and their main bank. However, understanding the role of collateral during a financial crisis implies to take into consideration other motivation that induce the banker to prefer secured loans.…”