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Distance and Modern Banks' Lending to SMEs: Decentralised versus Centralised Banking in Germany

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  • Flögel, Franz

Abstract

By lending to SMEs at low geographical distance, banks can realise competitive advantage due to enhanced access to soft information that allows the better screening of firms. As especially regional banks lend at a low distance, the decentralised German banking system is deemed ideal for SME finance. However, as banking regulation requires the use of rating systems for screening, it can no longer be assumed that modern regional banks “naturally” conduct credit decisions at lower distances to SMEs than big banks. In fact, drawing on an ethnographic study at one German savings bank and one big bank, this paper shows that the regional savings bank does not always reach credit decisions at a lower distance. However, at the moment when soft information becomes crucial the big bank decides at a high distance, which is likely to oppress the usage of soft information.

Suggested Citation

  • Flögel, Franz, 2016. "Distance and Modern Banks' Lending to SMEs: Decentralised versus Centralised Banking in Germany," IAT Discussion Papers 16/01, Institut Arbeit und Technik (IAT), Westfälische Hochschule, University of Applied Sciences.
    • Handle: RePEc:zbw:iatdps:1601
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    More about this item

    Keywords

    soft information; geographical distance; SME finance; rating systems; SME screening; regional banks;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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