Relationship Banking and SMEs: A Theoretical Analysis

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. (101 words)

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Year of publication:	2005
Authors:	Baas, Timo ; Schrooten, Mechthild
Publisher:	Berlin : Deutsches Institut für Wirtschaftsforschung (DIW)
Subject:	Klein- und Mittelunternehmen \| Verschuldungsrestriktion \| Kreditgeschäft \| Theorie \| Relationship Banking \| Financial Constraints \| Small and Medium Sized Enterprises \| Accounting

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Series:	DIW Discussion Papers ; 469
Type of publication:	Book / Working Paper
Type of publication (narrower categories):	Working Paper
Language:	English
Other identifiers:	478660421 [GVK] hdl:10419/18320 [Handle] RePEc:diw:diwwpp:dp469 [RePEc]
Classification:	G21 - Banks; Other Depository Institutions; Mortgages ; D82 - Asymmetric and Private Information ; D43 - Oligopoly and Other Forms of Market Imperfection ; M41 - Accounting
Source:	EconStor