Distance and Modern Banks’ Lending to SMEs: Ethnographic Insights from a Comparison of Regional and Large Banks in Germany

Abstract

By lending at a shorter functional distance, regional banks are associated with enhanced access to soft information compared with large banks, thus allowing superior screening, which consequently reduces credit rationing to small and medium-sized enterprises (SMEs). This article scrutinises this widespread assumed association, considering the ubiquitous application of rating systems that potentially reduce regional banks’ local credit-granting authority and obviate the necessity of proximity to reduce information asymmetries. Novel ethnographic insights into credit-decision processes, inter alia, of a regional operating savings bank and a large nationwide bank surprisingly reveal shorter functional distance of the large bank in approximately 50% of credit decisions because of the considerable credit-granting authority of local staff. Nevertheless, observations of soft information usage and credit-decision processes indicate that the regional bank is able to consider soft information when it most strongly influences lending decisions, i.e., when deciding whether to lend to financially distressed SMEs.