Cyclicality of SME Lending and Government Involvement in Banks

Abstract

Reproduction permitted only if source is stated. ISBN Non-technical summary Research QuestionWhich banks adjust their lending to small and medium enterprises more rapidly or more strongly to macro-economic fluctuations? How is the cyclicality of bank behavior related to the public mandate of savings banks and to the profit orientation of other banks? ContributionBased on international data, prior studies have shown how the lending behavior of large stateowned banks differs from private-sector banks, and both negative (e.g. inefficiencies and political influence) and positive aspects (e.g. the support of real sector development) have been identified. This paper looks specifically at German savings and cooperative banks, which allows for a comparison of banks with similar business models, size and regional focus. Furthermore, this study is the first to analyze how the cyclicality of lending to small and medium enterprises depends on bank ownership. ResultsComparing the behavior of these banks over several economic cycles , our results show that changes in GDP growth or alternative macro-economic variables have a significantly lower impact on lending by savings banks to small and medium enterprises than on lending by cooperative banks. This is surprising because savings banks and cooperative banks are both local banks and focus on basic financial services. The effects are sizable and robust: We control for financing structure, size, profitability and risk-taking of banks as well as for bank competition and political influence and do not find any effects that overshadow our main result. This leads us to the conclusion that policymakers can determine the cyclicality of the banking system or local banking markets by influencing the mix of banks that follow strict profit maximization and those that deviate from strict profit maximization. Nichttechnische Zusammenfassung AbstractRecent regulatory efforts aim at lowering the cyclicality of bank lending because of its potential detrimental effects on financial stability and the real economy. We investigate the cyclicality of SME lending by local banks with vs. without a public mandate, controlling for location, size, loan maturity, funding structure, liquidity, profitability, and credit demand-side factors. The public mandate is set by local governments and stipulates a deviation from strict profit maximization and a sustainable provision of financial services to local customers. We find that banks with a public mandate are 25 percent less cyclical than other local banks. The result is credit supply-side driven and especially strong for savings banks with high liquidity and stable deposit funding. Our findings have implications for the banking structure, financial stability and the finance-growth nexus in a local context.

Banks Business Models, Risk Management Systems And Small And Medium Enterprises Financing Proclivity In Zimbabwe

“…Recently, there has been a renewed research interest the area of SME financing, considering the growth in the globalisation of financial markets (Stevenson & Pond, 2016). The procyclicality of bank lending post---global crisis created unwanted response effects that reduced economies' allocative efficiency (Behr, Foos & Norden, 2017). Additionally, the global financial crisis of 2008-2009 brought about a negative shock to the growth of bank lending and consequently, SMEs access to financing, which is characterized by information asymmetry, was negatively affected (Cull & Pería, 2013).…”

“…The objectives of a bank, which include profit maximization essentially, influence the bank's lending behavior, scale, choice, and timing (Behr, Foos and Norden, 2017). In this context, smaller banks are generally willing to consider financing small firms than relatively large banks (Canales and Nanda, 2012).…”

“…One factor that has limited SMEs to access bank financing is information opacity, which is generally high in the young who generally do not have audited financial statements and thus they lack the financial information needed to make an informed decision on a business loan application (Hasana, Jackowicz, Kowalewski and Kozłowski, 2017). The greater probability of default prevalent among SMEs force banks to reduce the amount of credit advanced to these firms (Behr, Foos and Norden, 2017). SMEs are generally considered as riskier, more financially constrained and more bank---dependent than large firms and as such traditional methods of risk management may not be favorable for lending to SMEs (Ashton & Keasey, 2003).…”

“…SMEs are generally considered as riskier, more financially constrained and more bank---dependent than large firms and as such traditional methods of risk management may not be favorable for lending to SMEs (Ashton & Keasey, 2003). Bank lending to SMEs is always affected information asymmetries and its unattractive risk management practices (Behr, Foos & Norden, 2017). Accordingly, the following research hypothesis is formulated:…”