Relationship banking and SMEs

Abstract

"Reliable information on small- and mediumsized 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." (Author's abstract, IAB-Doku) ((en))

Cite article

Baas, T. & Schrooten, M. (2006): Relationship banking and SMEs. A theoretical analysis. In: Small Business Economics, Vol. 27, No. 2/3, p. 127-137. DOI:10.1007/s11187-006-0018-7