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Relationship banking and SMEs: a theoretical analysis

  • Baas, Timo
  • Schrooten, Mechthild

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 comparable 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. Copyright Springer 2006

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13424/1/DP470.pdf
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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number a470.

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Length: 24 p.
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:hit:hituec:a470
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