Relationship Banking and SMEs: A Theoretical Analysis

Timo Baas and Mechthild Schrooten

No 469, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

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 enterprises; Accounting (search for similar items in EconPapers)
JEL-codes: D43 D82 G21 M41 (search for similar items in EconPapers)
Pages: 24 p.
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Relationship Banking and SMEs: A Theoretical Analysis (2006)
Working Paper: Relationship banking and SMEs: a theoretical analysis (2005)
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