On the Persistence of Relationship Banking within a Bank-Based Financial System

Name: On the Persistence of Relationship Banking within a Bank-Based Financial System
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Author: Katharina Sauter
ISBN: 978-3-631-80479-7

Sauter, Katharina

On the Persistence of Relationship Banking within a Bank-Based Financial System

Post-Crisis Evidence from German SMEs

by Katharina Sauter (Author)

Law, Economics & Management

Series: Finance, Banking and Accounting, Volume 1

Summary

The overall financial market environment has undergone a dramatic shift in the past few years as a result of the recent global financial crisis, associated regulatory changes, and new market participants. This study undertook an online survey of 12,169 SMEs from all major sectors of the German economy. A total of 576 completed and usable questionnaires were collected. The aim of this study is to explore the nature of lending relationships in light of the past financial crisis, the resultant structural changes, and the competition of new entrants into the financial system. The study shows that relationship lending is essential for ensuring financial market stability.

Excerpt

Cover
Title Page
Copyright Page
About the author
About the book
Citability of the eBook
Overview
Table of contents
List of figures
List of tables
List of abbreviations
1 Introduction
1.1 The importance and relevance of relationship banking
1.2 Thesis structure
2 Theoretical foundations
2.1 Principal-agent theory
2.1.1 Principal-agent conflict
2.1.2 Conflicts of interest, information asymmetries, and the resulting risks
2.1.3 Instruments to reduce risk and governance systems
2.2 Financial intermediation in the context of principal-agent theory
2.2.1 The theory of financial intermediation
2.2.2 The role of banks
2.2.3 Incentive problems in bank lending
2.3 Characteristics of market- and bank-based financial systems
2.3.1 Market-based financial systems
2.3.2 Bank-based financial systems
2.3.3 Key differences between market- and bank-based financial systems
2.4 Relationship lending versus arm’s-length lending
2.4.1 Arm’s-length lending
2.4.2 Relationship lending
2.5 The German banking system and disruptive changes
2.5.1 The current transformation of the German banking system
2.5.2 Development of corporate financing of non-financial companies
2.5.3 Regulatory consequences of the 2007–2009 financial crisis
2.5.4 New market entrants into the financial and banking system
2.6 SMEs and family firms
2.6.1 Definition of family firms
2.6.2 Performance of family firms
2.6.3 Financing of family firms
2.7 Deriving the research model on relationship banking
2.7.1 Literature review on the economic costs and benefits of relationship banking
2.7.2 Evidence from market-based financial systems
2.7.2.1 Loan characteristics
Scope and finance share
2.7.2.2 Relationship characteristics
Information asymmetries and trust and loan officers
Number of bank lending relationships
Duration of lending relationship
Financial distress
2.7.2.3 Firm characteristics
2.7.2.4 Control variables
2.7.3 Evidence from bank-based financial systems
2.7.3.1 Loan characteristics
Scope and finance share
2.7.3.2 Relationship characteristics
Information asymmetries, trust and loan officers
Number of lending relationships
Duration of lending relationship
Bank type and distance
Financial distress
2.7.3.3 Firm characteristics
2.7.3.4 Control variables
2.7.4 Differences between market- and bank-based financial systems
2.7.5 Summary of empirical findings
2.8 Deriving the hypotheses based on the research model on relationship banking
2.8.1 Determinants of bank relationships
Country
Firms
Banks
2.8.2 Characteristics of bank relationships
Loan characteristics
Relationship characteristics
Firm characteristics
3 Data and methodology
3.1 Data collection methods
3.2 Sample design, pretest, and data collection
3.3 Survey design
3.4 Endogenous variables
Collateral Requirements
Cost of Debt
Credit Availability
3.5 Exogenous variables
Loan characteristics
Relationship characteristics
Firm characteristics
Control variables
3.6 Analytical methods
3.6.1 Ordinary least squares
3.6.2 The assumptions underlying the least squares method
3.6.3 The logit model
3.6.4 The probit model
3.7 Robustness tests of data
4 Empirical evaluation
4.1 Descriptive statistics
4.1.1 Firm characteristics and control variables
4.1.2 Loan characteristics
4.1.3 Endogenous variables
4.1.4 Relationship characteristics
4.1.5 Family firms versus non-family firms
4.2 Multivariate analyses
4.2.1 Full sample - Collateral requirements
4.2.2 Full sample - Collateral type
4.2.3 Full sample - Cost of debt
4.2.4 Full sample - Credit availability
4.2.5 Family versus non-family firms - Collateral requirements
4.2.6 Family firms versus non-family firms - Cost of debt
4.2.7 Family firms versus non-family firms - Credit availability
5 Concluding remarks
5.1 Summary and discussion of the main results
5.2 Limitations and avenues for future research
6 References
Appendix

List of figures

Figure 2-1: Basic model of the principal-agent relationship

Figure 2-2: Direct finance - Each investor monitors the borrowing firm

Figure 2-3: Intermediated finance - The bank monitors the borrowing firm

Figure 2-4: Germany’s three-pillar banking system

Figure 2-5: Components of corporate financing

Figure 2-6: Research model

Figure 2-7: Global studies by geography

Figure 2-8: Year of publication

Figure 2-9: Distribution of third-party databases and firm surveys

Figure 3-1: Data sources

Figure 4-1: Loan officer

Figure 4-2: Distribution of companies by age and size

Figure 4-3: Distribution of companies according to the sales growth and equity ratio

Figure 4-4: Distribution of companies by industry

Figure 4-5: Family firm assessment

Figure 4-6: Frequency of bank financing

Figure 4-7: Credit interest rate

Figure 4-8: Duration measured by average number of bank relationships

Figure 4-9: Finance share according to sales growth

Figure 4-10: Bank types and private banks

Figure A-1: Cover letter

Figure A-2: Questionnaire of the study

List of tables

Table 2-1: Incentive problems in the principal-agent relationship

Table 2-2: Structure of outstanding liabilities of non-financial corporations in Germany

Table 2-3: Number of bank branches in Germany compared to the previous year

Table 2-4: Top 10 German banks by balance sheet total for the financial years 2015 and 2016

Table 2-5: Distribution of studies

Table 2-6: Panel A – Collateral requirements, Panel B – Cost of debt, Panel C – Credit availability

Table 2-7: Number of bank relationships in market- versus bank-based financial systems

Table 2-8: Duration of bank relationships in market- versus bank-based financial systems

Table 3-1: Definition of endogenous and exogenous variables

Table 3-2: Overview of analytical methods

Table 3-3: Values of cumulative probability functions

Table 4-1: Summary of firm, loan, and relationship characteristics

Table 4-2: Number of banks according to average firm size, age, and finance share

Table 4-3: Overview of variables of family firms versus non-family firms

Table 4-4: Differences between family firms and non-family firms

Table 4-5: Probit regression – Full sample – Collateral requirements

Table 4-6: Probit regression – Full sample – Personal guarantees

Table 4-7: Ordinary least squares – Full sample – Cost of debt

Table 4-8: Probit regression – Full sample – Credit availability

Table 4-9: Probit regression – Family firm versus non-family firm sample – Collateral requirements

Table 4-10: Ordinary least squares – Family firm versus non-family firm sample – Cost of debt

Table 4-11: Probit regression – Family firm versus non-family firm sample – Credit availability

Table 5-1: Overview of confirmed and rejected hypotheses

Table 5-2: Matrix - Variables for bank lending terms and conditions

Table A-1: Correlation matrix – Spearman

Table A-2: Correlation matrix – Pearson

Table A-3: Correlation matrix – Kendall’s tau

Table A-4: Probit regression – Full sample – Collateral requirements with family firm variable

Table A-5: Ordinary least squares – Full sample – Cost of debt with family firm variable

Table A-6: Probit regression – Full sample – Credit availability with family firm variable

List of abbreviations

1 Introduction

1.1 The importance and relevance of relationship banking

In recent years, the world has witnessed a rapid restructuring of the financial market and banking landscape, primarily due to the 2007-2009 worldwide financial crisis and the subsequent increase in competition. Banks are under pressure from declining profits, and many are struggling with high amounts of non-performing, or “distressed,” loans. In some Southern European countries, the share of non-performing loans in certain bank portfolios is more than 45 %. Such distressed loans were one of the primary causes of the global financial crisis (Tauber 2017). Policymakers have ratcheted up the pressure on banks to reduce the number of distressed loans in their portfolios in an effort to prevent future crises. In addition to the regulatory consolidation through the Basel Accords, e.g., the implementation of leverage ratio requirements in 2013, banks are expected to take further action to reduce the risk of their day-to-day business activities (Bank for International Settlements 2014).

“In the aftermath of the recent financial crisis, many banks became either unwilling or unable to provide financing to companies. […] This development is especially striking given the traditionally close financing relationships between German corporations and banks” (Mietzner, Schweizer, and Proelss 2018, p. 375). Moreover, corporations tried to reduce their need for bank loans in the post-crisis period (Davis and Stone 2004; Deutsche Bundesbank 2012; Nassr and Wehinger 2015). As a result of these developments, German financing methods underwent some radical shifts, particularly with respect to external financing, which was much more volatile than internal financing after the crisis.

Generally, the ratio between internal and external financing has varied sharply over time. While in the past banks were the main lenders, they have gradually lost some luster in favor of other creditors such as affiliated companies (Deutsche Bundesbank 2012; European Central Bank 2017a, 2017b). During economic downturns, companies typically resort to bank financing. Likewise, this change is also related to bank supply-side factors, such as stricter credit standards during economic downturns, and rising regulatory requirements, which have increased the relevance of alternative funding sources. The significance of bank loans, especially for small and medium-sized enterprises (SMEs), decreased. However, bank loans still represent the single most important source of external financing, despite the fact that their overall intermediation services through traditional credit business has declined (Deutsche Bundesbank 2012).

Details

Pages: 352
Year: 2020
ISBN (PDF): 9783631804773
ISBN (ePUB): 9783631804780
ISBN (MOBI): 9783631804797
ISBN (Hardcover): 9783631802687
DOI: 10.3726/b16252
Language: English
Publication date: 2019 (November)
Keywords: Relationship lending Housebank Financial crisis Financial system Family firms SMEs Market stability
Published: Berlin, Bern, Bruxelles, New York, Oxford, Warszawa, Wien, 2020. 352 pp., 22 fig. b/w, 30 tables.

Biographical notes

Katharina Sauter (Author)

Katharina Sauter studied Corporate Management and Economics at Zeppelin University. She then pursued a part-time PhD program with a large accountancy firm and completed her PhD on relationship banking at the chair of «Banking and Finance» at Zeppelin University.

On the Persistence of Relationship Banking within a Bank-Based Financial System

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