Relationship Banking and Smes: A Theoretical Analysis

DIW Discussion Papers No. 469

27 Pages Posted: 11 Sep 2005

See all articles by Timo Baas

Timo Baas

German Institute for Economic Research (DIW Berlin); University of Potsdam

Mechthild Schrooten

German Institute for Economic Research (DIW Berlin)

Date Written: January 2005

Abstract

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.

Keywords: Relationship Banking, Financial Constraints, Small and Medium Sized Firms, SME, Accounting

JEL Classification: D43, D 82, G21, M41

Suggested Citation

Baas, Timo and Schrooten, Mechthild, Relationship Banking and Smes: A Theoretical Analysis (January 2005). DIW Discussion Papers No. 469 . Available at SSRN: https://ssrn.com/abstract=788344 or http://dx.doi.org/10.2139/ssrn.788344

Timo Baas (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany
030-89789344 (Phone)

HOME PAGE: http://www.timo-baas.de

University of Potsdam ( email )

Potsdam
Germany

Mechthild Schrooten

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany
+49 30 89789 344 (Phone)
+49 30 89789 108 (Fax)

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