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

Franz Flögel

Journal of Economic Geography, 2018, vol. 18, issue 1, 35-57

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 (search for similar items in EconPapers)
JEL-codes: D82 G21 R51 (search for similar items in EconPapers)
Date: 2018
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