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Thus the German banking sector includes a considerable number of banks which, in their pursuit of business opportunities, are at least to some extent governed by goals serving the common good. The British banking sector, in contrast, is dominated by private commercial banks which, due to intensified competition and a fluid market for corporate control, have to put the interests of their shareholders above those of other potential stakeholders Parkinson The greater diversity within the German banking system, particularly the growing ascendancy within the sub-section devoted to SME lending of banks not exclusively ruled by considerations of profit, are reflected by data on bank lending to domestic firms during the period from to In Germany, throughout this period, the savings banks, together with their regional and federal bank institutions, increased their proportion of the total lending to companies from 30 to 37 per cent, whereas the market share of commercial banks fell slightly from 36 per cent in to 32 per cent in The three largest commercial banks, which in accounted for 15 per cent of lending to corporate customers, were able to increase their share to 20 per cent.

The picture of a more decentralised and less concentrated market for bank lending to companies in Germany is complemented by the figures for the cooperative banks group organised along similar principles as the savings banks. This group provided about 10 per cent, and specialised commercial and develop- ment banks provided about 20 per cent, of lending to companies throughout the period Deutsche Bundesbank Even though no comprehensive data are available for lending to SMEs, figures concerning lending to craft businesses2 suggest that savings and cooperative banks occupy an even more important role in lending to these companies than is indicated by the overall figures.

In , for example, savings banks provided 57 per cent of the credit volume to craft business, followed by cooperative banks with 24 per cent and commercial banks with only 11 per cent Ellgering By , savings banks had managed to increase their share of lending to craft businesses to 65 per cent. They also provide a considerable proportion of loans to business start ups, financing every second start up in Deutscher Sparkassen- und Giroverband DSGV In contrast, the market for lending to small and medium-sized companies in Britain is highly concentrated.

According to figures in Bank of England Market shares for finance to SME start ups are similarly concen- trated. Several mergers which occurred during the late s between the largest banks e.


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A further important difference between the two banking systems is the differing propensity of banks to provide long-term credit to companies, and more specifically SMEs. As Table 1 illustrates, in Germany the proportion of long-term lending referring to loans granted for four and more years to domestic companies increased slightly from Throughout the period long-term lending volume accounted for an above average proportion of the overall lending of savings banks and specialised credit institutions, whereas it remained below average among the commercial and cooperative banks.

Overall, the comparison of the development of the term- structure of lending according to bank groups highlights the important role which German savings banks, together with co-operative and development banks, play in lending — and more specifically in long-term lending — to SMEs. Long-term lending as a proportion of total lending to domestic firms in Germany according to bank groups, Total lending to domestic firms Long-term lending as proportion in bill.

Long-term lending refers to loans which are granted for a duration of 4 or more years. Deutsche Bundesbank, Monatsberichte, various issues. End of the year data. Since the beginning of the s, however, the situation has changed considerably. Borrowing on overdraft has declined from According to data in Bank of England b , 42 per cent of term lending was for five or more years.

Within Britain, thus, there has been a considerable change in banks' lending practices to SMEs which is attributed in the literature to both the increasing stability of the economic environment and to changing attitudes on the part of banks and SME customers alike. Concerning density of branch networks, statistical data support a lower density in Britain than in Germany. In , in the UK there was, on average, one branch per 1, inhabitants, compared to one branch per 1, inhabitants in Germany. In both countries, the density of branch per inhabitants decreased during the following years but in it was still higher in Germany than it was in in Britain.

A comparison of German and British commercial banks indicates that, in Britain, branches of commercial banks have to serve a much higher number of inhabitants than in Germany, which again reflects the much higher concentration in the British commercial banking sector. In recent years, however, there has occurred a tendency of German commercial banks to reduce their branch networks, which is reflected in a narrowing gap between the two national systems, as reflected in the data displayed in Figure 1.

Density of branch network of British and German banks, and 5 4,5 4 3,5 3 Inhabitants per branch in thousand 2,5 2 1,5 1 0,5 0 All banks Commercial banks All banks Commercial banks Germany Britain Source: Bank for International Settlements , As a consequence of these structural differences in the SME sector, banks in both countries are faced with very different customer demands and hence risk decisions in financing SMEs.

Overall, it appears that institutional factors make German SMEs less problematic bank customers than their British counterparts. The relationship between German banks and SMEs has been described as rather close and stable over time, reflecting among other factors a relatively symmetric power relationship between both partners at least in comparison to other countries; De Saint-Louvent German banks provide not only accounting services and bank lending to SMEs but have recently also set up special business units which offer consulting services to SMEs and support for medium-sized companies which aim to go public.

Bank lending, however, still constitutes one of the core pillars of the bank-SME relationship in Germany, as is reflected by the increasing dependence of SMEs on bank lending during the s. Bank borrowing which in represented between 28 per cent and 32 per cent of the total balance sheet of small companies with an annual turnover up to 25 Mio. DM had increased to between 33 per cent and 40 per cent by Deutsche Bundesbank , whereas the ratio of own capital had fallen among SMEs Deutsche Bundesbank In contrast, the relationship between British banks and SMEs has been more problematic.

It has been characterised by a higher level of discontinuity and change in relationships, and a higher degree of dissatisfaction with and mistrust in banking policies De Saint-Louvent More recently, however, the relationship seems to have improved as indicated by various customer surveys. Some of this progress is attributable to the more stable economic environment in the UK compared to the ruptures of the early s, which has allowed SMEs to reduce their net bank indebtedness and to increase their long- term borrowing.

Efforts made by banks, small businesses and small business representative groups have also contributed to an improvement of the bank SME relationship Bank of England The importance of traditional bank finance overdrafts and term loans for SMEs has declined in recent years as small businesses have increasingly sought to diversify their sources of finance, but bank finance nevertheless remains the most important type of external finance for small businesses. In the period it accounted for 47 per cent of external finance, against 61 per cent in Since the largest UK retail banks and their subsidiaries are also the largest suppliers of other forms of lending, such as leasing, factoring and asset financing, their central role in financing SMEs has been maintained Cruickshank The motivations, perceptions and implicit rationalities which enter into this decision-making process reflect the institutionalised organisational rule systems of the banks in which they work.

These organisational rule systems are shaped by the institutional context of their society. In order to gain a better understanding of the ways in which the societal context influences decision-making processes on small firm lending in banks we will discuss in this section results of our own empirical research based on interviews with bankers in British and German banks.

The aim of this section is to analyse the impact of the institutional environment on risk handling strategies of banks. We assume that the institutional context will affect the risk handling strategies of banks in both countries, with respect to the degree and forms in which they will attempt to externalise part of the risk involved in lending to SMEs.

Externalisation can occur through pooling it with other institutions or by displacing it onto individual customers. Furthermore, we expect the institutional environment to impact on the ways in which banks internalise the handling of the remaining risk involved in lending to SMEs in their decision-making processes on such lending, as reflected in their organisational structures, informal routines and rule systems.

The focus in this section is thus on how banks as organisations construct and manage the risk involved in lending to SMEs in different institutional contexts.

Emphasising the specificities of each national system, in contrast, makes case based comparisons nearly impossible. In order to find a viable compromise our survey includes the banking groups in each country which provide a significant volume of loans to SMEs. The presentation of results for Germany will provide breakdowns for commercial compared to other banks as far as there are significant differences. Furthermore, we have attempted to differentiate as far as possible between SMEs of different size in our interviews with bankers. The following analysis is based on a sample of 12 banks seven British and five German banks.

In both countries, the sample includes large commercial banks operating nation-wide, as well as more regionally oriented banks. It is important to underline that the operations of local savings and cooperative banks, through close integration into their respective German-wide bank organization, go far beyond what an isolated regional bank could achieve. In Britain, the sample included five commercial banks — of which two subsequently merged — and two Scottish banks which, despite maintaining a network all over Britain, are considered to give more consideration to regional specificities.

In each bank interviews with higher-level managers, usually at headquarters, were conducted based on a questionnaire which consisted of three parts: Interviews were conducted with several higher middle managers responsible for the respective area of business. Overall, interviews lasted between two and four hours in each bank. Additionally, banks were asked to provide standardised data on their lending portfolio and information gathered for lending decisions in an advance questionnaire which was posted to them before the interview.

Advance questionnaires were returned by all German, but only by three British, banks. The interviews in British banks took place during the summer of and those in German banks were conducted in the early autumn of British and German banks in general distinguished between small, medium-sized and large corporate customers. With regard to the customer segment of small and medium-sized companies which is of interest here, it is significant that German banks on average operated with lower upper thresholds for both the small and the medium-sized category of business customers see table 3 4. In both countries small business customers are referred by banks to the ordinary services provided by the retail branches.

The 3 In Germany, additional interviews were conducted with representatives of intermediary organisations which play an important role in risk sharing and risk assessment. This included two semi-public guarantee banks and the chamber of commerce in the region in which the savings banks and the co-operative bank included in our sample were located. Data from these interviews have not been included in this paper but helped to cross-check information provided by the German banks. At the same time, the medium-sized category covers a wider spectrum of companies in Germany than in Britain.

Differences in customer segmentation reflect the distinctive size distribution of firms in the two countries. They also indicate that, during the s, British banks have been developing a stronger focus on, and have begun to invest more resources into, their activities for medium-sized companies, see also Bank of England Information provided to us by British and German banks. It is not by chance that the two commercial banks and the large savings bank in Germany mentioned that in the future they wanted to focus more closely on medium-sized companies as the most profitable segment of SME business.

For the two large commercial banks this implied the need for a world-wide or European-wide presence in this customer segment which they intended to achieve by reallocating resources from domestic to foreign markets, and from small to medium-sized business finance. In both countries, small firms accounted for the large majority of corporate customers that banks were dealing with 70 to 90 per cent though their relevance in terms of overall lending volume was clearly lower between 10 and 55 per cent.

In Britain and Germany, lending continued to constitute one of the core pillars of the relationship between banks and small firms. Survey banks generated most of their revenues in this customer category from interest between 60 and 74 per cent. In Britain, this seemed to be a reaction to the increased readiness of small businesses to switch banks and to terminate lending relationships, whereas in Germany it appeared to reflect a tendency of small firms to deal with more than one bank see Figure 2. Changes in the relationship between banks and small business during the last five years Small business becoming readier to switch banks to deal with more than one bank to require a wider range Britain of services Germany Banks becoming readier to terminate lending relationship to establish closer contact 1 2 3 4 5 1 of no importance - of highest importance 5 Source: The British banks interviewed had, as part of the overall banking crisis in the early s, incurred considerable losses in corporate lending, and more specifically in small firm lending.

German banks, in contrast, reported no or only minor losses in corporate and small business lending during the last five years if there had been losses, these referred to specific sub-sectors and were regarded as normal.

Banks in both countries stated that their current risk management aimed at improving monitoring and steering of the overall risk portfolio in this business area, but the means which they envisaged to do that varied considerably, as is analysed in more detail below. In contrast, German banks, situated in a more hierarchical bureaucratic and coordinated institutional setting which ensures them a greater amount of ex ante risk reduction, should focus more on the management and control of internalised risk.

If externalisation of risk takes place in German banks, it should take collectivist forms of risk sharing with intermediary organisations such as public loan guarantee schemes which have been in existence for a longer time and have a more encompassing character in Germany than in Britain.

British banks are said to make little effort to appraise individual loan applications, and to use instead the interest rate to price for risk differentials Cosh and Hughes The literature also suggests that British banks tend to lend more often short-term and at variable interest rates than their German counterparts, thereby displacing risks which they incur on the refinancing side to their customers Deakins and Philpott Another form of transferring risk to customers is to ask for higher collateral for loans which are considered to involve above average risks.

Whereas some studies report that British banks tend to take more collateral Kaufmann and Kokalj ; Binks British banks are said to take private property more often, whereas German banks take mainly business assets Kershaw In order to check the hypothesis that British banks are more likely than German banks to externalise risk by transferring it to customers, in our survey we followed a dual approach.

We asked bankers to describe their approach towards handling loan applications from small businesses and the terms of lending applied to this customer group. In addition, they were asked to provide statistics on their lending portfolio which would allow us to compare the term- structure, variability of interest rates and taking of collateral between German and British banks in a more detailed manner than is possible on the basis of official statistics.

In practice, however, the data provided was often not strictly comparable between banks and remained incomplete since many banks regarded this information as confidential. The average figures provided in the following section should thus be considered as rough estimates rather than exact measures. Official statistics provided above see Table 2 on the increase in recent years of granting term loans instead of overdrafts indicate a gradual shift in British banking practices see also Young et al.

The trend towards more long-term lending in Britain is also supported by the slight rise of long-term lending in statistics referring to term-structure by residual maturity BBA As stated above, the structure of lending of German banks is still much more oriented towards long-term lending than that of British banks, but the difference is now less stark than it has been in the past.

Regarding the use of fixed-term interest rates the results of the survey confirm persisting differences. British banks in our sample granted only slightly more than one-tenth of their loans to business customers using fixed-term interest rates. German banks, in contrast, provided more than half of their lending to this customer category based on fixed-term interest rates. The much lower proportion for Britain corresponds to in Bank of England data Since then, small businesses in Britain have gradually increased their usage of fixed rate loans, which according to the same source in September accounted for 24 per cent of total lending and 34 per cent of term lending.


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  5. With regard to collateral, the results suggest that British banks tend to take collateral on lending to business customers more often than German banks. In lending to small companies, however, they seem to take slightly less collateral, which might be related to the smaller average size of loans, as well as to the lower availability of collateral among small firms in Britain.

    As suggested in Bank of England The type of security taken did not differ significantly between countries, with British and German banks taking both tangible assets and private property. British and German bankers, however, referred to different criteria in determining whether collateral should be taken or not. Whereas German bankers reported that security was asked for as a result of the risk analysis of the loan application e.

    Finally, bankers were asked how they dealt with loan applications with apparent above average levels of risk: The answers tend to support the above described differences: British banks stated that they would use higher interest rates and higher security as well as more intensive monitoring if the customer paid for it. German banks showed more reluctance towards pricing higher risks. The savings and cooperative banks included in our sample rejected completely the idea of asking higher interest rates, whereas the two commercial banks said that they would have recourse to this strategy under certain conditions.

    Overall, pricing of above average risks was not considered as a feasible strategy by German banks. They considered that firstly, it normally would not cover fully the higher risk the bank engaged in, and secondly, due to the fierce competition between banks, it was difficult to impose on customers. Weak companies often even ask for lower interest rates in order to recover from their economic problems. As a consequence, German banks tended to be more selective in their loan decisions, and if granting loans with above average risk, tended to use a combination of asking for more security and engaging in more intensive monitoring.

    Overall, the results provide support for the hypothesis that British banks tend to externalise risks more often and more extensively, and to pass them on to customers, than German banks do. They use variable interest rates significantly more often in order to protect themselves against fluctuations in financial markets.

    German banks, in contrast, grant a considerably higher proportion of loans with fixed-term interest rates. In individual lending decisions, British banks seem to be more ready than German Banks to grant loans involving above average risk if the customer is ready to pay for it in terms of higher interest rates and to some extent also higher security. Risk sharing by intermediary organisations and the state has been, indeed, an accepted part of the post-war German social market economy, whereas it has not been so easily assimilated into the British liberal market approach Zysman ; Albert ; Hutton We therefore expected collective forms of risk sharing to be more widely used by German than by British banks.

    Empirical evidence confirms that this is the case with regard to two different forms of collective risk sharing. Firstly, savings and cooperative banks in Germany practice forms of collective risk pooling within the context of their banking groups. Through their regional and federal banking institutions, local savings and cooperative banks gain access to capital at lower interest rates and are shielded to some extent from the fluctuations of capital markets.

    Local savings and cooperative banks can draw on their assistance in order to provide large loans for local customers which go beyond their individual financial capacity. Last but not least, local savings and cooperative banks can draw on a large and valuable body of information through their banking groups and central banking organisations Vitols These forms of information pooling within banking groups do not exist in the highly competitive British banking system in which savings and cooperative banks have never played a significant role.

    A second form of collective risk sharing in which banks can engage in order to deal with above average risk in lending to small firms are Loan Guarantee Schemes LGS. Such schemes do exist in both countries. Their main task is to provide guarantees to banks which lend money to small businesses which wish to finance investments with longer-term prospects but are unable to provide the necessary collateral. Whereas German LGS have been in operation since the s the British scheme was introduced in and has only recently gained momentum Storey Since , the scheme has differentiated the treatment of established and start-up firms, and in the maximum loan term was increased to 10 years Bank of England Hughes and Leube have undertaken a detailed analysis of the use made by British and German banks of Loan Guarantee Schemes.

    Their results confirm that the British scheme became more widely used during the first half of the s. Nevertheless, in the overall number and the volume of guarantees, as well as the default rates of lending through these schemes, still differed considerably between the two countries. These variations reflect the different constitution of loan guarantee schemes in Britain and Germany, as well as differences in the use which banks in both countries make of these schemes. The higher number of new guarantees issued by the German loan guarantee schemes in indicate that the use of these schemes is rather common in German banks.

    In Britain, loan guarantees have become also more wide-spread but the number of new guarantees issued in was still lower than in Germany. Information collected in our interviews with British and German bankers confirms this picture. Respondents from large commercial banks in Germany estimated that per cent of their overall lending to the corporate sector and 25 per cent of their lending to Mittelstand firms medium- sized enterprises involved public guarantee schemes. The schemes were also reported to be widely used for larger business start-ups. In addition to the provision of guarantees, bankers regarded the external loan appraisal through public guarantee banks as one of the virtues of the loan guarantee scheme.

    This has to be seen against the background of the different way in which the British LGS has been set up.

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    Over the period from to , the average volume of newly issued guarantees increased more strongly in Germany than in Britain, and thereby reinforced pre-existing differences. In , the average volume of new guarantees issued by German loan guarantee schemes was nearly three times as large as that of their British counterpart. More recent data indicate a drop of LGS loans in terms of numbers and volume in Britain compared to a continued rise in Germany, as well as continuing differences between the countries regarding the average size of LGS loans Bank of England Another important factor, however, is the specific use that German banks make of loan guarantee schemes.

    Risk sharing in the context of these schemes is used predominantly for investment projects of medium-sized enterprises and larger business start-ups. Most of the German banks stated in the interviews that the amount of work necessary for the application and the duration of the decision-making procedure in order to obtain a public loan guarantee made them ineffective if applied to small firms and small business start-ups. This view was particularly pronounced among the savings and cooperative banks which deal more often with smaller firms.

    As a consequence, respondents of savings and cooperative banks reported much lower proportions of their lending to be supported by loan guarantee schemes than the large commercial banks estimated as below 1 or 2 per cent of total lending to the corporate sector. One explanation for the lower popularity of LGS among British banks is that default rates of lending secured through Loan Guarantee Schemes have been relatively high. Reforms of the scheme have been able to reduce the default rate in Britain during the first half of the s whereas in Germany it increased slightly following the extension of the system to East Germany.

    In , however, the default rate in Britain was still This can be explained by the fact that in Germany, default risks are shared between the bank which grants the loan and the Loan Guarantee Scheme, and banks therefore have an interest in a rather intensive screening of such loan applications. In Britain, in contrast, the bank granting the loan does not carry default risks but displaces them to the state.

    An additional explanation, however, must be sought in the type of firm supported, with British LGSs being more likely than German ones to support high-risk start-up firms. Recent attempts to establish schemes of collective risk sharing for lending to small firms in Britain have not been equally successful. This has been often attributed to the state-led character of the British schemes. One important strategy of risk control refers to the use of information designed to reduce the unpredictability and variability of outcomes.

    Equally, the information searched for and the way in which it is processed within banks is not a matter of objective facts. Instead, each bank develops its own internal screening system, in which different categories are selected or similar categories prioritised to different degrees. Banks will then deploy the information thus obtained as a base for decision-making on lending Baecker Our previous analysis of the institutional environment in both countries Lane and Quack led us to expect that the sources of information used and the processes applied to the selection of risk in lending decisions would display specific country patterns, beyond any variation between individual banks.

    In particular, we assumed that the existence of a pluri-lateral network of intermediary organisations, and the ensuing greater availability of information on SMEs, would enable German banks to assemble a larger and more varied amount of information, particularly from external sources, than their British counterparts. Existence of legal obligations to reveal existing debts in Germany provide banks with an additional source of information, not available in Britain.

    Furthermore, the existing literature suggested that British banks use the past financial performance of firms as a signal of credit worthiness. German banks, in contrast, are reputed to consider in addition more qualitative and future- oriented aspects of the loan application Deakins and Philpott ; Wood et al. In our interviews we asked banks which sources of information, criteria for credit-worthiness and decision-rules they used in the assessment of loan applications from small business customers. Interesting differences appeared between different banking groups in Germany.

    As Figure 3 indicates, the principal sources of information used by German and British banks and the relative importance accorded to them in terms of providing background information, were quite similar. Banks in both countries considered company reports and accounts, information provided by the loan applicant and internal data bases as very important or of highest importance. The higher importance accorded by British banks to commercial databases reflects the Anglo-Saxon market-led approach of externalising risk assessment to specialised private companies and professionals e.

    Instead, German banks in our sample gave slightly more emphasis — even though at a low level — to intermediary organisations cham- bers of commerce, industry and trade associations as principal sources of information, which again reflects the specific institutional environment. Principal sources of information used by banks on small business customers Newspapers, media Reports of other banks Industry and trade associations Chamber of commerce Britain Germany Word of mouth Commercial databases Internal databases Company reports and accounts 1 2 3 4 5 1 of no importance - of highest importance 5 Source: Even though German banks can scan a wider range of information sources on small business customers than British banks, the key sources which they use in assessing loan applications are basically the same as in British banks.

    Banks in both countries reported reliance mainly on company reports and accounts, information provided by the applicant and internal data bases — in Britain complemented by external commercial data bases. Whereas the first included also information from other sources such as intermediate organisations, German commercial banks — like British banks — accorded no or only little importance to these additional sources of information. In this respect, saving and cooperative banks seem to be more strongly inserted into pluri-lateral networks than their commercial competitors.

    Specific sources of information used by banks to assess loan applications of small business customers Newspapers, media Reports of other banks Britain Industry and trade associations Chamber of commerce Germany: Commercial databases savings and coop Internal databases b k Information supplied by the applicant Company reports and accounts 1 2 3 4 5 1 of no importance - of highest importance 5 Source: A further difference in the process of information procurement between the two national banking systems is the quality of information obtained from the main sources listed above.

    This is particularly the case with regard to the information which banks can obtain from loan applicants themselves. In Britain no equivalent regulation exists. This information was rated as highly important by German respondents whereas the use of such data was not particularly emphasised by British bankers. Additionally, bankers were asked to give a detailed description of the decision-making rules applied in assessing loan applications.

    This is in contrast to German banks' greater emphasis on managerial qualities and the future prospects of the applicant's project or business. Three of the four British banks which responded to this question listed predominantly financial indicators such as account performance, cash position, personal credit references, forward orders, etc.

    Only one bank explicitly included sector risk and management quality as a weighted factor in the assessment the former being accorded per cent, the latter about 30 percent, compared to financials with 25 and projected financials with 15 per cent. Two other banks stated — when asked for — that they would also look at the quality of management and make use of site visits.

    Overall, however, the assessment of the latter was considered as subjective and unreliable. In addition, quality of management was listed by all German bankers as an important item to be included with a weighting of between approximately 10 to 33 per cent, depending on the bank. In contrast to the British banks, the assessment of this factor was not regarded as particularly problematic by German interview partners. On the contrary, a certain subjective component was even considered necessary and desirable. In general, German bankers favoured case-based over class-based decision-making in lending to small business customers.

    This was reflected in their negative attitude towards the automation of lending decisions in this customer segment — an attitude which was found in only one of the British banks included in the survey. One of the German bankers even stated that their experience with different computer-based loan assessment schemes during the last ten years showed that the statistical methods used in these programs still produced more defaults than they had actually in their books.

    The preferences for case-based versus class-based approaches to risk assessment, as displayed in the answers of the German and British respondents respectively, might however, not do full justice to the actual situation found in banks of both countries. It has to be kept in mind that German commercial banks have separated out very small firms, to be dealt with in the retail branches. When the German interviewees rejected automation of lending decisions, they were likely to have in mind a more medium-sized firm whereas for their British counterparts small firms would have been the main reference group.

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    In sum, commercial banks in the two countries are using similar information in assessing loan applications, whereas the numerically dominant German savings and cooperative banks differed somewhat from their commercial competitors in the type of information consulted. But German and British banks make different use of it. As far as scanning the environment for information is concerned, German savings and cooperative banks appear to be embedded more deeply into the institutional environment than German commercial banks.

    The indicators of credit worthiness which banks extract from their sources of information as well as the decision-making rules applied to loan applications, however, show greater homogeneity within than across countries. German banks tend to use a more case-based approach orientated towards the quality of management and the future potential of the firm compared to British banks which rely on a class-based approach with strong focus on the financial situation and past development of SMEs.

    Even if future prospects of small firms have recently been given more weight by British banks, as suggested by Bank of England , the focus rests on financial indicators, such as business intentions and cash flow. Since the literature suggests that German banks tend to internalise more risks than British banks, we would expect them also to devote more organisational resources to bureaucratic methods of standardising procedures and creating uniformity in decision-making than do British banks.

    This should result in a greater variety in the mode and outcome of decision-making on risks in British than in German banks. The evidence collected for German banks suggests a gradual departure from what Baecker According to this strategy, banks attempt to absorb the insecurities involved in their decision-making through specialisation of their organisational structures and processes see also Knight This implies a bureaucratisation of the decision-making process through a separation between customer acquisition and credit control, and standardised methods of assessment, double checking and a system of cascading discretion limits in decision-making on loan applications.

    Furthermore, a separation of customer acquisition from credit control leads to sequential decision-making. As a result of these two procedures, the overall risk involved in a decision is transformed into partial risks dealt with by different organisational units or different hierarchical levels. Bureaucratic methods of standardisation tend to take the consideration of risk out of day-to-day routines since decision-making is prescribed by rules which leave little discretion about risk taking to the individual staff. In contrast to the findings of studies conducted before ours Quack and Hildebrandt , , a number of German banks in our sample reported that they had given up the strict division between customer acquisition and credit control in order to increase speed and efficiency of their decision-making.

    Two commercial banks and one savings bank had recently introduced teams consisting of relationship managers, credit officers and other specialised staff dealing with a group of specific SME customers. Two banks one commercial and one savings bank emphasised that, in order to increase efficiency and speed of decision-making, they were reducing the number of the hierarchical levels involved in the decision-making process. Applications would be immediately forwarded to the level of the hierarchy responsible for the respective size of lending, while intermediate levels of the hierarchy would be informed only after the decision had been taken.

    These banks, thus, were attempting to re-integrate decision-making on lending to SMEs, or at least to reduce the degree of sequential decision-making. The other savings bank and the cooperative bank in our sample were still operating the classical division between customer acquisition and credit control, as well as hierarchical systems of discretion limits. They did not intend to change these. In general, commercial banks tended to grant higher discretion limits to individual managers than savings and cooperative banks.

    But even German banks which had reduced the incidence of sequential decision-making by introducing teams still kept a relatively strong focus on standardisation of decision-making. The main instrument to achieve this standardisation was computer-based expert systems for rating loan applica- tions. The final decision, however, was still taken by the relationship manager. Standardisation of decision-making itself was, according to the German respondents, achieved through previous training and work experience particularly as credit officer 7.

    Variations in assessment, if at all, would occur only with regard to the evaluation of the management of the company in question. Some bankers also referred to existing written guidelines on lending, but compared to the practical application of the rating systems they seemed to be of less importance. Four of five German banks stated that they were satisfied with the degree of standardisation reached, and most of them explained that it was more a matter of steering the risk portfolio than achieving complete standardisation, which was considered as not possible.

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