What’s Common to Relationship Banking and Relationship Investing? Reflections within the Contractual Theory of the Firm

The financial systems in continental Europe are subject to profound changes in the institutions of market exchange. Banks traditionally holding close relationships with firms are substituted by non-bank institutional investors. The present paper examines whether this implies a substitution of relationship finance by arm’s length finance or of firm-like organization by market exchange. Within the contractual theory of the firm, we seek common features of relationship banking and relationship investing. Extending the governance structure approach, we show that both are hybrid organizations, whose comparative advantages depend on two kinds of asset specificity. They are complements to finance and control firms with different redeployability and information opaqueness of assets.banks, institutional investors, financial systems, corporate governance, markets vs. hierachies, theory of the firm

Direct Banking - A Demand Pull and Technology Push Innovation

Since 1994, the German banking market is confronted with an entry wave of direct banks. This banking innovation may be explained by developments on the supply side as well as on the demand side. It is pushed by developments in telecommunication technologies during a period of rising cost competition and pulled by a change in the demand for selling efforts by banks. Within a model of monopolistic competition with endogenous selling efforts we show that in the long run, a direct banking market supports a larger number of firms which offer their products at lower prices than a branch banking market. If customers are heterogeneous, both banking types will survive.

What’s Common to Relationship Banking and Relationship Investing? Reflections within the Contractual Theory of the Firm

The financial systems in continental Europe are subject to profound changes in the institutions of market exchange. Banks traditionally holding close relationships with firms are substituted by non-bank institutional investors. The present paper examines whether this implies a substitution of relationship finance by arm’s length finance or of firm-like organization by market exchange. Within the contractual theory of the firm, we seek common features of relationship banking and relationship investing. Extending the governance structure approach, we show that both are hybrid organizations, whose comparative advantages depend on two kinds of asset specificity. They are complements to finance and control firms with different redeployability and information opaqueness of assets.banks, institutional investors, financial systems, corporate governance, markets vs. hierachies, theory of the firm

Microenterprises and Multiple Bank Relationships: Evidence from a Survey among Professionals

An overview of previous evidence about relationship banking to SMEs shows that multiple banking relationships prevail even at small firms, but there is hardly evidence on the number of banking relationships held by micro firms. To close this gap, we use data from a survey conducted among professionals in Germany in 2002. Being self-employed persons acting in the services sector, professionals are mostly informationally opaque micro firms. To explain the number of their banking relationships, we investigate characteristics of the firm and its loan demand, characteristics of the housebank and its relationship to the borrower, and variables of bank market structure and regulation. Consistent with the theory of asymmetric information, we find that these firms hold a small number of bank relationships, which increases in firm size and age. An increase in the duration or importance of the housebank relationship does not induce multiple banking relationships as predicted by the hold-up theory. Professionals rather tend to hold multiple banking relationships to increase their credit availability and finance larger loans. The type of the housebank and local banking market concentration do not seem to matter. All in all, the results indicate that multiple bank relationships help to overcome credit rationing.

The Number of Bank Relationships of SMEs: A Disaggregated Analysis for the Swiss Loan Market

The present paper investigates the number of bank relationships of small and medium-sized enterprises in Switzerland using survey data from 1996 and 2002. We differentiate between overall bank relationships and lending relationships and disaggregate the loan market with respect to firm sizes, industries and banking groups. On average, bank lending declined, while the role of housebank relationships increased in 1996- 2002. The development of the number of bank relationships seems to have been demand-driven as well as supply-driven for medium-sized firms, but only supply-driven for very small and small firms. Supply-side reductions resulted from the merger between two big banks and changes in credit risk management at major banks.relationship lending, housebank, loan market structure, multiple banks

The Number of Bank Relationships of SMEs: A Disaggregated Analysis for the Swiss Loan Market

The present paper investigates the number of bank relationships of small and medium-sized enterprises in Switzerland using survey data from 1996 and 2002. We differentiate between overall bank relationships and lending relationships and disaggregate the loan market with respect to firm sizes, industries and banking groups. On average, bank lending declined, while the role of housebank relationships increased in 1996-2002. The development of the number of bank relationships seems to have been demand-driven as well as supply-driven for medium-sized firms, but only supply-driven for very small and small firms. Supply-side reductions resulted from the merger between two big banks and changes in credit risk management at major banksrelationship lending, housebank, loan market structure, multiple banks

Do Lending Relationships Matter? Evidence from Bank Survey Data in Germany

Strong lending relationships between banks and small and medium-sized enterprises (SMEs) play a key role in the bank-based financial system of Germany. So far, they have been mainly described by the notion of a housebank and transactional features of long-term bank-customer relationships. In contrast, the present paper also considers interactional variables which try to measure social relations between loan officer and firm manager. Using bank survey data, the relationship and interaction variables prove to affect loan prices, collateral requirements and credit availability.

SME Loan Pricing and Lending Relationships in Germany: A New Look

Strong lending relationships between banks and small and medium-sized enterprises (SMEs) play a key role in the bank-based financial system of Germany. So far, they have been mainly described by the notion of an housebank and transactional features of long-term bank-customer relationships. The present paper takes a new look by considering also interactional variables which try to measure social relations between loan officer and firm manager. We find that these variables do affect loan pricing, but that their influence varies according to firm age and housebank status.Banking, Relationship Lending, Small Business Finance

Relationship Finance by Banks and Non-Bank Institutional Investors: A Review within the Theory of the Firm

In continental Europe, banks are more and more replaced by non-bank institutional investors in the financing and control of firms. This must not imply a shift to arm's length finance, if these institutional investors develop relationships with firms similar to the traditional longterm bank-firm relationship. The present paper differentiates between relationship banking and relationship investing within the theory of the firm and compares the financial and corporate control services provided by both arrangementsrelationship banking, relationship investing, banks, institutional investors, corporate governance, theory of the firm

The Number of Bank Relationships of SMEs: A Disaggregated Analysis for the Swiss Loan Market

The present paper investigates the number of bank relationships of small and medium-sized enterprises in Switzerland using survey data from 1996 and 2002. We differentiate between overall bank relationships and lending relationships and disaggregate the loan market with respect to firm sizes, industries and banking groups. On average, bank lending declined, while the role of housebank relationships increased in 1996- 2002. The development of the number of bank relationships seems to have been demand-driven as well as supply-driven for medium-sized firms, but only supply-driven for very small and small firms. Supply-side reductions resulted from the merger between two big banks and changes in credit risk management at major banks.relationship lending, housebank, loan market structure, multiple banks