Relationship Banking and SMEs: A Theoretical Analysis

Abstract

Abstract:Reliable information on small and medium sized enterprises (SMEs) is rare and costly for financial intermediaries. Therefore relationship banking is often considered as the appropriate lending technique. In this paper we offer a theoretical model to analyze relationship banking and the pricing behavior of banks in a Bertrand competition framework with monitoring costs.We show that the lack of reliable information leads to comparably high interest rates even if a long-term relationship between borrower and bank exists. The paper offers a theoretical explanation why SMEs often are faced with borrowing constraints. (91 words)

Relationship lending and SME financing in the continental European bank-based system

“…Thus, they do not support the hypothesis that higher quality firms tend to maintain exclusive or highly concentrated bank relationships. 13 It is also consistent with the model developed by Baas and Schrooten (2006). those associations we use the medians of the variables Length and Concentration to divide the sample into four sub-groups, and re-estimate Model (2) in Table 5: Regression (1) is estimated on firms with a bank relationship of less than or equal to 15 years, Regression (2) on firms with a bank relationship exceeding 15 years, Regression (3) on firms working with one or two banks, and Regression (4) on firms working with more than two banks.…”

Collateral, relationship lending and family firms

“…by demanding a higher amount/degree of collateral) from its ex post superior bargaining power (Menkhoff et al 2006). Being able to negotiate with multiple banks avoids the monopolization of information on the borrower's quality as well as any kind of rent extraction (Baas and Schrooten 2007;Hernández-Cánovas and Martínez-Solano 2007). Moreover, it implies a threat for a bank of losing a certain firm as borrower to a competitor.…”

Effect of credit guarantee policy on survival and performance of SMEs in Republic of Korea

“…SMEs suffer from credit rationing since there lack somewhat sufficient financial information and standardized financial statements. While small surviving firms have higher growth potential than the average, this potential could be limited by the availability of external finance (Baas & Schrooten, 2006;Becchetti & Trovato, 2002;Hyytinen & Väänänen, 2006;Oliveira & Fortunato, 2006).…”