Journal Article

Distance and Modern Banks’ Lending to SMEs: Ethnographic Insights from a Comparison of Regional and Large Banks in Germany

Franz Flögel

in Journal of Economic Geography

Volume 18, issue 1, pages 35-57
Published in print January 2018 | ISSN: 1468-2702
Published online July 2017 | e-ISSN: 1468-2710 | DOI: https://dx.doi.org/10.1093/jeg/lbx017
Distance and Modern Banks’ Lending to SMEs: Ethnographic Insights from a Comparison of Regional and Large Banks in Germany

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  • Banking
  • Information, Knowledge, and Uncertainy
  • Regional Government Analysis

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Abstract

By lending at a shorter functional distance, regional banks are associated with enhanced access to soft information compared with large banks, thus allowing superior screening, which consequently reduces credit rationing to small and medium-sized enterprises (SMEs). This article scrutinises this widespread assumed association, considering the ubiquitous application of rating systems that potentially reduce regional banks’ local credit-granting authority and obviate the necessity of proximity to reduce information asymmetries. Novel ethnographic insights into credit-decision processes, inter alia, of a regional operating savings bank and a large nationwide bank surprisingly reveal shorter functional distance of the large bank in approximately 50% of credit decisions because of the considerable credit-granting authority of local staff. Nevertheless, observations of soft information usage and credit-decision processes indicate that the regional bank is able to consider soft information when it most strongly influences lending decisions, i.e., when deciding whether to lend to financially distressed SMEs.

Keywords: Soft information; SME finance; functional distance; rating system; regional bank; credit rationing; G21; D82; R51

Journal Article.  11075 words.  Illustrated.

Subjects: Banking ; Information, Knowledge, and Uncertainy ; Regional Government Analysis

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