Relationship lending works: more credit and lower loan rates for SMEs - Inaugural Address by Lars Norden
Lars Norden, endowed professor of Banking and Finance at Rotterdam School of Management, Erasmus University (RSM) will give his inaugural address, The Role of Banks in SME Finance, on Friday 20 February 2015. He will explore the role of banks in finance for small and medium enterprises (SMEs) and argue that relationship lending works, but that trade credit has limited scope to replace bank debt when banks are forced to cut their lending.
Small and Medium Entreprises (SMEs) represent around 99% of all businesses in the European Union, and they are more ‘informationally opaque’ – keeping their information private – and also more risky, more financially constrained and more dependent on banks than large firms. This creates serious challenges for lenders, says Lars Norden.
Norden will focus on lending technologies such as relationship lending and trade credit arrangements that emerged to cope with key challenges in SME finance. He asks if lending technologies work, who benefits, and are there differences between countries? What do SMEs do when banks cut lending?
Basing his answers on two recent empirical studies, Norden will argue that relationship lending works. He will present evidence from a meta-analysis carried out across several countries that shows that, on average, borrowers benefit from relationship lending. They get more credit and lower loan rates. Furthermore, competition between banks makes it more likely that borrowers will get the benefits.
He will also argue that trade credit has limited scope to replace bank debt when banks are forced to cut their lending, as happened in the financial crisis. SMEs in Europe have offset shock to their bank debt to some extent with trade credit. However, substitution became difficult during the financial crisis and was only possible for a subset of firms, those with better quality credit histories and intermediate financial constraints.
Professor Norden was appointed to the chair of Banking and Finance, endowed by the Erasmus Trust Fund, on 1 April 2014. It was created to promote high quality research into bank lending, especially SME finance, credit risk, the production of information and its sharing, and bank regulation and accounting. Norden is a Fellow at the European Banking Center at Tilburg University, and a Duisenberg Research Fellow. He has been a visiting researcher at the Getulio Vargas Foundation, Indiana University and the Research Center of the Deutsche Bundesbank. He holds a doctoral degree in business administration from the University of Mannheim and graduate degrees from the University of Mannheim and ESSEC Business School. He is a regular presenter at top conferences and his work has been published in the leading academic journals. Norden teaches banking, corporate finance and credit risk. A video about his research can be found on RSM Discovery
His inaugural address will take place on Friday, 20 February 2015. The ceremony will start at 16:00 in the Senate Hall in the Erasmus Building at Erasmus University, Rotterdam, Burgemeester Oudlaan 50 in Rotterdam. A reception will take place at 16:45 in the same building.
Rotterdam School of Management, Erasmus University (RSM) is ranked among Europe’s top 10 business schools for education and among the top three for research. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam - a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who carry their innovative mindset into a sustainable future thanks to a first-class range of bachelor, master, MBA, PhD and executive programmes. RSM also has offices in the Amsterdam Zuidas business district and in Taipei, Taiwan. www.rsm.nl
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