Sustainable Finance
Variety in Banking? A Comparison of Corporate Finance in Regional Banks and Large Banks in Germany
(Research project supported by a doctoral grant from the German Academic Scholarship Foundation, 2012–2017)
The lending procedure at regional banks that are at shorter distances from their customers in comparison to large banks is associated with better access to ‘soft’ information, which facilitates an exact risk assessment and should in turn reduce the rationing of loans to small and medium-sized enterprises (SMEs) (Klagge, 1995; Pollard, 2003; Berger et al., 2005 Alessandrini et al., 2009; Gärtner, 2009b; Zademach, 2011; Gärtner and Flögel, 2014). However, in light of standardization (particularly through the universal implementation of rating systems for risk assessment) and standardized banking regulations, it is unclear to what extent regional banks still differ from large banks. With this in mind, regional banks’ and large banks’ lending to SMEs was evaluated in this doctoral project on the basis of participant observation and 40 interviews with experts. Prof. Dr. Hans-Martin Zademach supervised the project.
Surprisingly, the results show that in around 50 percent of lending decisions the large bank that was studied was a shorter distance from the SME than the savings bank that was observed would have been. The reason for this is the considerable decision-making power that the large bank gives its account managers in its branches when the SMEs have good ratings. However, the observations of real credit applications from customers in financial difficulties show that the savings bank evaluates soft information reliably in cases where it is this information that has the strongest influence on the decision, i.e. when the SME’s rating is critical. In these cases that the distance between the customer and the large bank increases massively, as the bank withdraws the account managers’ power to make a decision when ratings are critical. It can therefore be concluded that the savings banks make decisions at shorter distances to SMEs in exactly the cases where this matters, i.e. when SMEs are in financial difficulty and therefore have critical ratings.
Project conducted by: Dr. Franz Flögel
Publications:
Flögel, F. und Zademach, H.-M. 2017: Bank branches as places of knowledge creation : Conceptual considerations and empirical findings at the micro-geographical scale. In: Erdkunde : archive for scientific geography. 71 (2017) 4., S. 301-312.
Flögel, F. 2017: Distance and modern banks’ lending to SMEs: ethnographic insights from a comparison of regional and large banks in Germany. In: Journal of economic geography 17, July 2017.
Flögel, F. 2015: The new realist ontology: metatheoretical foundation for research of modern finance? In: Zeitschrift für Wirtschaftsgeographie 59 (4), pp. 230-242.
Gärtner, S. and Flögel, F. 2017: Zur Bedeutung und Zukunft dezentraler Banken für die KMU-Finanzierung in Deutschland. In: ZfKE - Zeitschrift für KMU und Entrepreneurship 65 (1/2), pp. 41-60.