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Theuer, Bernhard (2007) Bank finance of medium-sized enterprises in Germany: lessons from UK experience. Doctoral thesis, London Metropolitan University.
This thesis concentrates on the bank finance of medium-sized enterprises with an annual turnover between EUR 3 (£2 million) and EUR 50 million (£35 million). Focusing on medium-sized companies is valuable from an economic and social point of view as they play a crucial role in global markets. It is the medium-sized firms that are the growth engine and guarantors for stability of an economy, particularly in Germany. When this piece of research was started in late 2002, the financial environment for SMEs in Germany had changed dramatically. On the one hand there was an intense and widespread public discussion of SMEs' further access to finance and a credit crunch discussion was omnipresent; on the other hand German banks were posting poor results. Small firms are especially vulnerable because of their dependence on financial institutions for external funding. To ensure the competitiveness of the national economy, a successful strategy for SME-finance is indispensable. The key to this is bank-finance. Therefore, a sound banking sector is crucial. The point of view taken here is that if, as in the UK, banks are clearly earning above their costs of capital while at the same time access to finance is not a major constraint for enterprises, then the general situation can be regarded as healthy. This thesis aims to work out lessons for medium-sized enterprise banking in Germany. Why is a comparison made with the UK? Unlike the situation in Germany, the UK economy is doing very well, SMEs have sufficient access to finance and British banks, operating in a market-orientated financial system, are highly profitable, in particular in their SME-banking activities. The focus of this study is procedures and priorities in medium-sized enterprise banking. The main method is qualitative interviews with banks' senior relationship mangers and senior risk managers dealing with the allocation of money to medium-sized enterprises in Germany and the UK. The banks covered by the survey in this thesis are responsible for the supply of banking services to more than 90% of all SMEs in each country. In Germany, two savings banks, two cooperative banks, HypoVereinsbank, Commerzbank and Dresdner Bank took part, and in the UK, Barclays, HSBC, Lloyds TSB, Royal Bank of Scotland and Bank of Scotland contributed to the empirical research. In this research a semi-structured interview technique containing a well-balanced mixture of open and closed questions was applied. The research methods are deeply indebted to prior research in the field. In terms of the number of banks, the number and duration of interviews, the quality of interviewees and the interview content this empirical work stands out to all others works carried out so far. As regards SME finance, the German financial system as archetype of bank-orientation and the UK financial system as a prototype of a transaction-based financial system do not differ much; the UK system in this context is very much bank-based. However, in respect to procedures, priorities and attitudes several important differences were detected. In this study several aspects of corporate banking - namely the banks' organisation structure, risk assessment and credit approval, risk-adjusted pricing, cross selling, banks' market shares, mezzanine finance and other factors such as the use of covenants - have been surveyed in Germany and the UK. Thus, in the first instance, differences between Germany and the UK have been considered for each factor on its own. Thereby, some results conflict with the conventional wisdom. Finally, 'seven lessons learned' are drawn. Regarding standardisation, the use of IT, the approach to risk, the orientation to profitability and sales, risk-adjusted pricing and non-interest revenue generation German banks can learn from their British counterparts.
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