IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Relationship Banking and SMEs: A Theoretical Analysis

  • Timo Baas
  • Mechthild Schrooten

Reliable information on small and medium sized enterprises (SMEs) is rare and costly for financial intermediaries. To compensate for this, relationship banking is often considered as the appropriate lending technique in the case of SMEs. In this paper we offer a theoretical model to analyze 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 SME managers consider external finance as a major constraint to their business.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.42833.de/dp469.pdf
Download Restriction: no

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 469.

as
in new window

Length: 24 p.
Date of creation: 2005
Date of revision:
Handle: RePEc:diw:diwwpp:dp469
Contact details of provider: Postal: Mohrenstraße 58, D-10117 Berlin
Phone: xx49-30-89789-0
Fax: xx49-30-89789-200
Web page: http://www.diw.de/enEmail:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Boot, Arnoud W A & Thakor, Anjan V, 1994. "Moral Hazard and Secured Lending in an Infinitely Repeated Credit Market Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 899-920, November.
  2. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2004. "Bank Competition and Access to Finance: International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 627-48, June.
  3. Frédérique Bracoud, 2002. "Sequential Models of Bertrand Competition for Deposits and Loans under Asymmetric Information," Game Theory and Information 0211002, EconWPA.
  4. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn.
  5. Boot, Arnoud W. A & Schmeits, Anjolein, 1998. "Challenges to competitive banking: a theoretical perspective," Research in Economics, Elsevier, vol. 52(3), pages 255-270, September.
  6. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  7. Allen Berger, 2006. "Potential Competitive Effects of Basel II on Banks in SME Credit Markets in the United States," Journal of Financial Services Research, Springer, vol. 29(1), pages 5-36, February.
  8. Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. " The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, vol. 48(1), pages 247-66, March.
  9. Allen N. Berger & Gregory F. Udell, 2001. "Small business credit availability and relationship lending: the importance of bank organizational structure," Finance and Economics Discussion Series 2001-36, Board of Governors of the Federal Reserve System (U.S.).
  10. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
  11. Wagenvoort, Rien, 2003. "Are finance constraints hindering the growth of SMEs in Europe?," EIB Papers 7/2003, European Investment Bank, Economics Department.
  12. Jun, Byoung & Vives, Xavier, 2004. "Strategic incentives in dynamic duopoly," Journal of Economic Theory, Elsevier, vol. 116(2), pages 249-281, June.
  13. Frame, W Scott & Srinivasan, Aruna & Woosley, Lynn, 2001. "The Effect of Credit Scoring on Small-Business Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 813-25, August.
  14. Boot, Arnoud W A & Milbourn, Todd, 2002. "Credit Ratings as Coordination Mechanism," CEPR Discussion Papers 3331, C.E.P.R. Discussion Papers.
  15. Lummer, Scott L. & McConnell, John J., 1989. "Further evidence on the bank lending process and the capital-market response to bank loan agreements," Journal of Financial Economics, Elsevier, vol. 25(1), pages 99-122, November.
  16. Gal-Or, Esther, 1986. "Information Transmission-Cournot and Bertrand Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 85-92, January.
  17. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  18. Allen N. Berger & Gregory F. Udell, 1998. "The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle," Finance and Economics Discussion Series 1998-15, Board of Governors of the Federal Reserve System (U.S.).
  19. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
  20. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  21. Allen N. Berger & Seth D. Bonime & Daniel M. Covitz & Diana Hancock, 1999. "Why are bank profits so persistent: the roles of product market competition, informational opacity, and regional/macroeconomic shocks," Finance and Economics Discussion Series 1999-28, Board of Governors of the Federal Reserve System (U.S.).
  22. Thorsten Beck, 2003. "Small and medium enterprises, growth, and poverty : cross-country evidence," Policy Research Working Paper Series 3178, The World Bank.
  23. Diamond, Douglas W & Verrecchia, Robert E, 1991. " Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-59, September.
  24. Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 415-32, July.
  25. Harrington, Joseph Jr., 1989. "A re-evaluation of perfect competition as the solution to the Bertrand price game," Mathematical Social Sciences, Elsevier, vol. 17(3), pages 315-328, June.
  26. repec:ner:tilbur:urn:nbn:nl:ui:12-3125507 is not listed on IDEAS
  27. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
  28. Steven A. Sharpe, 1990. "Switching costs, market concentration, and prices: the theory and its empirical implications in the bank deposit market," Finance and Economics Discussion Series 138, Board of Governors of the Federal Reserve System (U.S.).
  29. Edward C. Prescott & John H. Boyd, 1986. "Dynamic coalitions, growth, and the firm," Staff Report 100, Federal Reserve Bank of Minneapolis.
  30. Rajan, Raghuram & Winton, Andrew, 1995. " Covenants and Collateral as Incentives to Monitor," Journal of Finance, American Finance Association, vol. 50(4), pages 1113-46, September.
  31. Allen, Linda & Saunders, Anthony & Udell, Gregory F., 1991. "The pricing of retail deposits: Concentration and information," Journal of Financial Intermediation, Elsevier, vol. 1(4), pages 335-361, December.
  32. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2002. "Financial and legal constraints to firm growth - Does size matter?," Policy Research Working Paper Series 2784, The World Bank.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp469. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bibliothek)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.