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Relationship Banking and SMEs: A Theoretical Analysis

Aufsätze referiert extern - Web of Science

Timo Baas, Mechthild Schrooten

In: Small Business Economics 27 (2006), 2-3, S. 127-137


Reliable information on small- and medium-sized enterprises (SMEs) is rare and costly for financial intermediaries. Therefore relationship banking is often considered as the appropriate lending technique. In this paper we offer a theoretical model to analyze relationship banking and the pricing behavior of banks in a Bertrand competition framework with monitoring costs. We show that the lack of reliable information leads to comparable high interest rates even if a long-term relationship between borrower and bank exists. The paper offers a theoretical explanation why SMEs often are faced with borrowing constraints.