Loan Officers and Relationship Lending

Abstract

Current theoretical and empirical research suggests that small banks have a comparative advantage in processing soft information and delivering relationship lending. The most comprehensive analysis of this view found using U.S. data that smaller SMEs borrow from smaller banks and smaller banks have stronger relationships with their borrowers (Berger, Miller, Petersen, Rajan, and Stein 2005) (BMPRS). We employ essentially the same methodology as BMPRS on a unique Japanese data set but our findings are different in interesting ways. Like BMPRS we find that more opaque firms are more likely to borrow from small banks. Unlike BMPRS, however, our methodology allows us to attribute this to the ability of large banks to deliver financial statement lending. Finally, quite unlike BMPRS we do not, on balance, find that small banks have stronger relationships with their SMEs. We offer some speculation on potential explanations for these differences. One possibility is that the credit culture and deployment of SME lending technologies differ in Japan from the U.S. However, we note that strong conclusions cannot be reached without more research.

Keywords: Banks, Small and Medium Enterprises, Relationship, Japan, Soft information

JEL Classification: G21, L22, G32, D82, D83