Firm-bank relationships and bank selection criteria: empirical evidence from Austrian and German companies.

AuthorMitter, Christine

    Banks play an essential role in a company's financial management. On the one hand, banks act as financiers providing companies with the funding sources necessary to set up, maintain, develop and grow their businesses. On the other hand, they provide companies with services that help them to enter the capital markets (through public equity or corporate bonds), optimize their financial management (e.g., by cash pooling, netting or the provision of advisory services) or hedge their financial risks (e.g., future trading, factoring, insurance). Consequently, banks are often regarded as strategic partners of companies; indeed, as a result of the financial crisis, their central role for corporations might have even gained in importance (Lind, 2008). Thus, the active management of a firm's bank relationships should be among the top priorities of corporate finance.

    Previous research investigated the determinants of bank relationships (Ongena and Smith, 2000; Neuberger et al., 2008) and the optimal number of them (Detragiache et al., 2000; von Rheinbaben and Ruckes, 2004), as well as the impact of bank ownership type (Berger et al., 2008), bank mergers (Degryse et al., 2009) and the institutional environment (Hernandez-Canovas and Koeter-Kant, 2010) on firm-bank relationships. While empirical evidence has focused on the outcome of such relationships, especially relationship lending (Elsas and Krahnen, 1998; Harhoff and Korting, 1998; Boot, 2000; Elsas, 2005), relationship concentration (Guiso and Minetti, 2010; Ongena et al., 2012), the propensity to switch banks (Ongena and Smith, 2001; Farinha and Santos, 2002) or to form new relationships (loannidou and Ongena 2010; Gopalan et al., 2011), relatively little is known about the way a company manages its bank relationships, i.e. its reasoning for choosing a bank, in particular its main bank, and its arguments for reducing or increasing the number of banks.

    Based on an empirical study of nonfinancial companies from German-speaking countries, this paper aims at providing insights into the factors that determine the way bank relationships are selected and managed. Factors that influence the number and kind of bank relationships are analyzed, shedding further light on how firms do business with their banks and on crucial parameters in this process.

    Despite banks' essential role in corporate finance and the breadth, depth and volume of the corporate banking market (Tyler and Stanley, 1999), decision criteria and other influential factors that determine the way corporate customers choose and manage their banking relationships have been scarcely researched (Proenga and de Castro, 2005; Guo et al., 2010). It is this topic that the following paper takes up. The contributions of this study to extant literature are threefold: First, it adds to the growing body of surveys on bank relationships in European countries (e.g., Detragiache et al., 2000; Ongena and Smith, 2000; Ongena et al., 2011, Ongena et al., 2012) by providing further and detailed evidence on the factors that determine the number of banks, in particular the number of main banks, and the bank selection criteria in two German-speaking countries, namely Austria and Germany. Second, in contrast to other studies that are based on bank data (e.g., Degryse and Van Cayseele, 2000; Elsas, 2005), credit registers and/or balance sheet data (e.g., Detragiache et al., 2000; Berger et al., 2001; Ongena et al., 2012), this study investigates firm-bank relationships from the company's point of view through the use of a questionnaire which asks nonfinancial companies about their number of bank relationships and the way they select and manage them. Third, although a significant body of research has been devoted to consumers' selection of banks (e.g., Boyd et al., 1994; Devlin, 2002; Devlin and Gerrard, 2004; Petruzzellis et al., 2011), there have only been a few attempts (e.g., Mols et al., 1997; Guo et al., 2010; Ongena et al., 2011) to examine the factors that govern corporate customers' selection of banks.

    The remainder of the paper is organized as follows. In the second part a review of the literature on firm-bank relationships is provided. Based on these findings, hypotheses are formulated with regard to the number of bank relationships, the factors that determine a company's main bank(s) and bank selection criteria. Part three describes the sample and methodologies used. Section four presents and discusses the results of the empirical study. The paper concludes with a summary of the findings as well as a recommendation concerning avenues of future research.


    2.1. Firm-bank relationships

    The Austrian and German banking systems are universal banking systems; hence, there is no legal requirement to separate commercial banking from investment banking. Therefore, most banks offer an all-encompassing range of services, including the distribution of products not traditionally linked with banks (e.g., insurance). As Austria and Germany are characterized by a bank-based financial system banks often have equity stakes in or strategic alliances with pension funds and insurance companies. Moreover, as a result of bank mergers, the banking industry in both countries has gone through a process of consolidation. The capital markets are less developed and utilized than in market-based financial systems. Consequently, banks still provide the main source of funding in these countries and are considered to be among the most important business partners of corporations.

    There is much debate in literature on whether single or multiple banking relationships are more beneficial to firms (e.g., Detragiache et al., 2000). Single banking relationships seem to provide cost advantages as dealing with more than one bank involves significant transaction costs. Apart from the fees that banks charge for their accounts and services, the opportunity costs have to be considered as well. For example, if a firm has more than one account it may pay interest for credit on one account while having a deposit on another account. Moreover, the firm's cash might not always be "parked" on the account with the most favorable terms. In addition to this, time and human resources are tied up when dealing with multiple banks and personal bankers. Furthermore, debt renegotiation is likely to be more complex when multiple banks are involved (Detragiache et al., 2000). All these factors might negatively affect a firm's profitability. Using Norwegian publicly listed firms, Degryse and Ongena (2001) have found a negative relationship between the number of bank relationships and sales profitability. Drawing on a sample of Italian small manufacturing firms, Castelli, Dwyer and Hasan (2012) arrived at similar results: the firm's performance measured by return on assets and return on equity decreases with the number of bank relationships.

    On the other hand, an exclusive bank relationship provides the bank with access to superior information about a specific firm. This might give rise to the so-called "hold up" problem that allows the bank to extract rents from the firm through higher future charges such as interest on loans (Sharpe, 1990; Rajan, 1992; von Thadden, 1994). Dealing with more than one bank, mitigates this hold up problem. Furthermore, one bank might not be able to provide a firm with all the banking services needed. This seems extremely likely when the firm is large, complex and geographically dispersed and therefore requires a wide array of services in many locations (Berger et al., 2008; Neuberger et al., 2008). Multiple bank relationships are seen as insurance against a premature withdrawal of credit or other services (Berger et al., 2008). By maintaining relationships with many banks, the likelihood that at least one bank would continue offering loans and services rises. This argument seems especially valid when banks are relatively fragile (Detragiache et al., 2000).

    The legal and institutional environment in which banks operate also influences the decision between single and multiple banking relationships as banks and firms might use the number of bank relationships to mitigate a country's legal and institutional constraints. While single banking is expected to dominate in countries with efficient law enforcement mechanisms and a strong protection of creditor rights due to its cost advantages, the likelihood of multiple bank relationships increases in less favorable environments. Drawing on a sample of SMEs from 19 European countries, Hernandez-Canovas and Koeter-Kant (2010) find that the likelihood of multiple banking is the highest for SMEs in countries with a French civil law system, followed by countries with a German civil law system. Additionally, the probability of multiple banking relationships increases for companies operating in countries with a highly developed and concentrated banking sector and where capital markets are smaller and less active. Analyzing data from large European corporations from 20 countries, Ongena and Smith (2000) find that firms maintain more bank relationships in countries with inefficient judicial systems and poor protection of creditor rights as well as in countries with unconcentrated but stable banking systems and active public bond markets.

    In sum, according to the above reasoning, single banking relationships should not be common in Austria and Germany due to their legal and institutional environment. Moreover, the likelihood of maintaining multiple bank relationships is higher for larger firms and for international companies.

    The current global financial crisis has increased bank fragility worldwide. Smaller firms tend to be more opaque and suffer more from information asymmetries (Berger and Udell, 1998). Consequently, they might be more likely to be denied credit or other bank services if their bank defaults and should therefore be more likely...

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