Inaugural Address: The Role of Banks in SME Finance

On Friday, the 20th of February, Lars Norden, Professor of Banking and Finance, presented his inaugural address entitled ‘The Role of Banks in SME Finance’.

About the Inaugural Address

In his inaugural address Lars Norden will reflect on the role of banks in SME finance. There are at least two reasons why this topic is interesting. SMEs represent around 99% of all firms in the European Union. Second, SMEs are more informationally opaque, more risky, more financially constrained and more bank-dependent than large firms, which creates serious challenges for lenders. Norden will focus on lending technologies such as relationship lending and trade credit that emerged to cope with key challenges in SME finance. He will raise the following questions: Do lending technologies work? Who benefits? Are there differences across countries? What do SMEs do when banks cut lending?

He will summarize two recent empirical studies and draw two main conclusions. The first conclusion is that relationship lending works. Evidence from a meta-analysis in a cross-country context shows that on average borrowers benefit from relationship lending by obtaining more credit and/or lower loan rates. Furthermore, bank competition makes benefits for borrowers more likely. The second conclusion is that trade credit has limited scope to replace bank debt when the latter is subject to a shock. SMEs in Europe have countered a shock to their bank debt to some extent with trade credit. However, substitution has become difficult during the financial crisis and was only possible for a subset of firms: the ones with better credit quality and intermediate financial constraints.

About Lars Norden

Professor Norden obtained the chair of Banking and Finance at the Rotterdam School of Management, Erasmus University (RSM) on April 1, 2014, which is endowed by the Erasmus Trust Fund. This chair was created to promote top-notch research on bank lending, especially SME finance, credit risk, information production and sharing, and bank regulation and accounting. Norden is Fellow at the European Banking Center, Duisenberg Research Fellow, and 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 on banking, corporate finance and credit risk.

Photos: Chris Gorzeman / Capital Images