IDEAS home Printed from https://ideas.repec.org/p/zbw/iatdps/1601.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/173345/1/IAT_Discussion_Paper_16_01.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Andre Torre, 2008. "On the Role Played by Temporary Geographical Proximity in Knowledge Transmission," Regional Studies, Taylor & Francis Journals, vol. 42(6), pages 869-889.
    2. Hans Degryse & Steven Ongena, 2005. "Distance, Lending Relationships, and Competition," Journal of Finance, American Finance Association, vol. 60(1), pages 231-266, February.
    3. Canales, Rodrigo & Nanda, Ramana, 2012. "A darker side to decentralized banks: Market power and credit rationing in SME lending," Journal of Financial Economics, Elsevier, vol. 105(2), pages 353-366.
    4. Andreas Hackethal & Reinhard H. Schmidt & Marcel Tyrell, 2006. "The transformation of the German financial system," Revue d'économie politique, Dalloz, vol. 116(4), pages 431-456.
    5. Pietro Alessandrini & Andrea F. Presbitero & Alberto Zazzaro, 2010. "Bank size or distance: what hampers innovation adoption by SMEs?," Journal of Economic Geography, Oxford University Press, vol. 10(6), pages 845-881, November.
    6. Alberto Zazzaro & Michele Fratianni & Pietro Alessandrini (ed.), 2009. "The Changing Geography of Banking and Finance," Springer Books, Springer, edition 1, number 978-0-387-98078-2, April.
    7. Sumit Agarwal & Robert Hauswald, 2007. "Distance and information asymmetries in lending decisions," Proceedings 1052, Federal Reserve Bank of Chicago.
    8. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    9. Berger, Allen N. & Miller, Nathan H. & Petersen, Mitchell A. & Rajan, Raghuram G. & Stein, Jeremy C., 2005. "Does function follow organizational form? Evidence from the lending practices of large and small banks," Journal of Financial Economics, Elsevier, vol. 76(2), pages 237-269, May.
    10. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 407-443.
    11. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    12. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
    13. Andre Torre & Alain Rallet, 2005. "Proximity and Localization," Regional Studies, Taylor & Francis Journals, vol. 39(1), pages 47-59.
    14. Donald MacKenzie, 2006. "An Engine, Not a Camera: How Financial Models Shape Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134608, December.
    15. Pietro Alessandrini & Andrea F. Presbitero & Alberto Zazzaro, 2009. "Geographical Organization of Banking Systems and Innovation Diffusion," Springer Books, in: Alberto Zazzaro & Michele Fratianni & Pietro Alessandrini (ed.), The Changing Geography of Banking and Finance, edition 1, chapter 0, pages 75-108, Springer.
    16. Hans Degryse & Nancy Masschelein & Janet Mitchell, 2004. "SMEs and Bank Lending Relationships: the Impact of Mergers," Working Paper Research 46, National Bank of Belgium.
    17. Jose M. Liberti & Atif R. Mian, 2009. "Estimating the Effect of Hierarchies on Information Use," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4057-4090, October.
    18. Uchida, Hirofumi & Udell, Gregory F. & Yamori, Nobuyoshi, 2012. "Loan officers and relationship lending to SMEs," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 97-122.
    19. Harald Bathelt & Sebastian Henn, 2014. "The Geographies of Knowledge Transfers over Distance: Toward a Typology," Environment and Planning A, , vol. 46(6), pages 1403-1424, June.
    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. Pietro Alessandrini & Andrea F. Presbitero & Alberto Zazzaro, 2009. "Global banking and local markets: a national perspective," Cambridge Journal of Regions, Economy and Society, Cambridge Political Economy Society, vol. 2(2), pages 173-192.
    22. Ron Boschma, 2005. "Proximity and Innovation: A Critical Assessment," Regional Studies, Taylor & Francis Journals, vol. 39(1), pages 61-74.
    23. Britta Klagge & Ron Martin, 2005. "Decentralized versus centralized financial systems: is there a case for local capital markets?," Journal of Economic Geography, Oxford University Press, vol. 5(4), pages 387-421, August.
    24. Degryse, Hans & Kim, Moshe & Ongena, Steven, 2009. "Microeconometrics of Banking Methods, Applications, and Results," OUP Catalogue, Oxford University Press, number 9780195340471.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Franz Flögel, 2018. "Distance and Modern Banks’ Lending to SMEs: Ethnographic Insights from a Comparison of Regional and Large Banks in Germany," Journal of Economic Geography, Oxford University Press, vol. 18(1), pages 35-57.
    2. Gärtner, Stefan & Fernández, Jorge, 2018. "The banking systems of Germany, the UK and Spain form a spatial perspective: The Spanish case," IAT Discussion Papers 18/02, Institut Arbeit und Technik (IAT), Westfälische Hochschule, University of Applied Sciences.
    3. Gärtner, Stefan & Flögel, Franz, 2014. "Call for a Spatial Classification of Banking Systems through the Lens of SME Finance - Decentralized versus Centralized Banking in Germany as an Example," IAT Discussion Papers 14/01, Institut Arbeit und Technik (IAT), Westfälische Hochschule, University of Applied Sciences.
    4. Franz Flögel & Marius Beckamp, 2020. "Will FinTech make regional banks superfluous for small firm finance? Observations from soft information‐based lending in Germany," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 49(2), July.
    5. Flögel, Franz & Gärtner, Stefan, 2018. "The banking systems of Germany, the UK and Spain form a spatial perspective: The German case," IAT Discussion Papers 18/04, Institut Arbeit und Technik (IAT), Westfälische Hochschule, University of Applied Sciences.
    6. Gärtner, Stefan & Flögel, Franz, 2014. "Call for a Spatial Classification of Banking Systems through the Lens of SME Finance - Decentralized versus Centralized Banking in Germany as an Example," EconStor Preprints 97512, ZBW - Leibniz Information Centre for Economics.
    7. Luca Papi & Emma Sarno & Alberto Zazzaro, 2017. "The geographical network of bank organizations: issues and evidence for Italy," Chapters, in: Ron Martin & Jane Pollard (ed.), Handbook on the Geographies of Money and Finance, chapter 8, pages 156-196, Edward Elgar Publishing.
    8. Flögel, Franz & Gärtner, Stefan, 2018. "Bankensysteme aus raumwirtschaftlicher Perspektive," Working Paper Forschungsförderung 099, Hans-Böckler-Stiftung, Düsseldorf.
    9. Pietro Alessandrini & Andrea Filippo Presbitero & Alberto Zazzaro, 2008. "Global Banking and Local Markets," Mo.Fi.R. Working Papers 4, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    10. Ferri, Giovanni & Murro, Pierluigi, 2015. "Do firm–bank ‘odd couples’ exacerbate credit rationing?," Journal of Financial Intermediation, Elsevier, vol. 24(2), pages 231-251.
    11. Djedidi-Kooli, Salima, 2009. "L’accès au financement des PME en France : quel rôle joué par la structure du système bancaire ?," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8354 edited by Etner, François.
    12. Porzio, Claudio & Sampagnaro, Gabriele & Verdoliva, Vincenzo, 2020. "Lost in Translation: The determinants and the effect of soft information dispersion in bank lending," Global Finance Journal, Elsevier, vol. 43(C).
    13. Kilian Huber, 2021. "Are Bigger Banks Better? Firm-Level Evidence from Germany," Journal of Political Economy, University of Chicago Press, vol. 129(7), pages 2023-2066.
    14. Zarutskie, Rebecca, 2013. "Competition, financial innovation and commercial bank loan portfolios," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 373-396.
    15. Beck, Thorsten & Degryse, Hans & De Haas, Ralph & van Horen, Neeltje, 2018. "When arm's length is too far: Relationship banking over the credit cycle," Journal of Financial Economics, Elsevier, vol. 127(1), pages 174-196.
    16. Santikian, Lori, 2014. "The ties that bind: Bank relationships and small business lending," Journal of Financial Intermediation, Elsevier, vol. 23(2), pages 177-213.
    17. Beck, Thorsten & Degryse, Hans & De Haas, Ralph & van Horen, Neeltje, 2018. "When arm's length is too far: Relationship banking over the credit cycle," Journal of Financial Economics, Elsevier, vol. 127(1), pages 174-196.
    18. Marko Jakšič & Matej Marinč, 2019. "Relationship banking and information technology: the role of artificial intelligence and FinTech," Risk Management, Palgrave Macmillan, vol. 21(1), pages 1-18, March.
    19. Ross Levine & Chen Lin & Qilin Peng & Wensi Xie, 2020. "Communication within Banking Organizations and Small Business Lending," The Review of Financial Studies, Society for Financial Studies, vol. 33(12), pages 5750-5783.
    20. Tlili, Rim, 2012. "Comment justifier la multibancarité au sein des PME ?," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/10919 edited by Etner, François.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:iatdps:1601. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/iatgede.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.