Distance and modern banks' lending to SMEs : decentralised versus centralised banking in Germany

By lending to SMEs at low geographical distance, banks can realise competitive advantage due to enhanced access to soft information that allows the better screening of firms. As especially regional banks lend at a low distance, the decentralised German banking system is deemed ideal for SME finance. However, as banking regulation requires the use of rating systems for screening, it can no longer be assumed that modern regional banks "naturally" conduct credit decisions at lower distances to SMEs than big banks. In fact, drawing on an ethnographic study at one German savings bank and one big bank, this paper shows that the regional savings bank does not always reach credit decisions at a lower distance. However, at the moment when soft information becomes crucial the big bank decides at a high distance, which is likely to oppress the usage of soft information.