Relationship Banking

RelationshipBanking

15th VolumeJanuary 2013issue #2

Column I. ArnoldProtect relationship banks from internet grasshoppers

Interview J. ScheelbeekHead of Senior Relation-ship Banking Wholesale Clients Netherlands

Column P. FransesDo something useful for customers

p34p26 p37

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Relationship Banking

Preface

Dear reader,

Here it is, the second edition of the FSR Forum. We are already halfway through the academic

year but just started the year 2013. I would like to use this moment to wish you all the best for

this year.

The theme of the second edition of the FSR Forum is ‘Relationship Banking’. Relationship

banking is about offering customers services and financial products that are more than just

simple checking and savings accounts. Some products of relationship banking are safe deposit

boxes, insurance, credit cards, loans and investments. So relationship banking is all about

creating a long-term relationship with the clients. After this edition you will have a better

understanding of this interesting topic.

In this edition we will have three scientific articles that will contribute to the creation of a

better understanding of relationship banking. The first article is from mister Boot. He reviews

the role of banks as relationship lenders and the close relationships they develop with borrowers

over time. Such proximity between the bank and the borrower has been shown to facilitate

monitoring and screening and can overcome problems of asymmetric information which are

explained in the article.

The second article is written by madam Presbitero and mister Zazzarro. In this paper, they

suggest that the non-monotonic effect of market concentration on relationship lending is not

due to the degree of concentration per se, but to the interplay between market concentration

and the type of competitors operating in the local credit market. More precisely, their research

hypothesis is that what prevails between the investment and the strategic theories of

relationship lending depends on the organizational structure of the local banking system.

The third and last article is from mister Gopalan, mister Udell and mister Yerramilli. Given the

documented benefits of relationship lending, it is curious why firms switch banks so often. In

this article, they address this question using an extensive data set of 30,466 loans originated by

850 banks to 13,788 borrowers in the United States.

In this edition you will also find an interview with Jeroen Scheelbeek. Mister Scheelbeek is the

Head of Senior Relationship Banking Wholesale Clients Netherlands from the Rabobank

International. Mister Scheelbeek joined Rabobank in 1997, where he worked in various senior

positions in the areas of structured finance, corporate finance and relationship banking.

Furthermore, you will find two columns written by professors of the Erasmus university in this

FSR Forum. The first column is written by professor Arnold. In his column professor Arnold

writes about the differences between relationship banks and transaction banks and the consequence

the credit crisis has on these banks. The second column is written by professor Franses. In his

column he discusses that banks should do more for their customers and why this is useful.

fsrforum • volume 15 • issue #2

2 • Preface

Also this edition we have a column of mister Groeneveld. This time he wrote about retirement.

Mister Groeneveld explains the current pension structure and gives his opinion about this

structure.

The Newsupdate in the FSR Forum is as always related to the topic of the FSR Forum. In this

edition you will find that the subject of the Newsupdate is bank lending to businesses. In the

Newsupdate you can read all about the changes of bank lending and the bank credit each year.

In the remainder of this FSR Forum you will find an overview of our activities that took place.

You will find a short description of the Accountants Firms Day, Finance Day, Traders Trophy

and International Banking Cycle. Besides the activities for our members, we also had an active

members day. You can read all about this day for our committee members.

This edition ends with the FSR activity agenda. Here you can find all the events that are still to

come.

I would also like to make you aware of the fact, although we are just six months on the go, that

from now on we are going to look for our successors. So if you are interested or if you want to

know more about a board year at the FSR, please do not hesitate to contact us. You can also

come by our office to drink a coffee and ask all your questions.

I hope you will enjoy reading this edition of the FSR Forum and I wish to see you sometime at

one of our many activities.

Sincerely,

Maaike Lanphen

Editor in Chief FSR Forum

FSR board 2012-2013

Preface • 3

Table of contents

ColofonFSR FORUM appears five times a year and is an edition of the Financial Study Association RotterdamKvK Rotterdam no: V 40346422VAT no: NL 805159125 B01ISSN no: 1389-0913

15th volume, number 2, circulation 1900 copies

Editor in chiefMaaike Lanphen

Editorial department Petra van den AkkerRoija Rasuli

Editorial advisoryDr. M.B.J. SchautenDr. W.F.C. VerschoorDrs. R. Van der Wal RA

With the cooperation ofA.W.A. BootDrs. J.G. Groeneveld RA RVA.F. PresbiteroG. RadhakrishnanJ. ScheelbeekG.F. UdellV.YerramilliA. ZazzarroProf. Dr. I. ArnoldT. Moolenaar

R. van OvostM. Petutschnig

Editorial addressEditiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06Postbus 1738, 3000 DR RotterdamTel. 010 408 1830E-mail: [email protected]

Relationship Banking: What Do We Know?A.W.A. BootThe proliferation of transaction-oriented banking (trading) and direct funding available in the

financial markets has started to seriously challenge banks’ future as relationship bankers. This has

raised a host of interesting theoretical and empirical questions, the exploration of which has begun

to shape the modern literature on relationship banking that is briefly reviewed in this paper. 6

Competition and Relationship Lending: Friend or Foes?A.F. Presbitero and A. ZazzarroIn this paper, they suggest that the non-monotonic effect of market concentration on relationship

lending is not due to the degree of concentration per se, but to the interplay between market

concentration and the type of competitors operating in the local credit market. More precisely,

their research hypothesis is that what prevails between the investment and the strategic theories

of relationship lending depends on the organizational structure of the local banking system. 14

Why do firms switch banks?G. Radhakrishnan, G.F. Udell and V. YerramilliWhile most of the empirical literature has tried to highlight the benefits of lending relationships,

by focusing on the determinants of lending relationships, they highlight both the benefits and

costs of lending relationships. While lending relationships can benefit opaque borrowers by

enabling banks to reuse soft information, their paper highlights that there are attendant costs

too, especially if the existing relationship is with a small bank that may not be able to meet a

firm’s growing borrowing needs. 18

Relationship Banking

4 • Table of contents


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Interview J. Scheelbeek 26

Head of Senior Relationship Banking Wholesale

Clients Netherlands

Column Joost Groeneveld PhD 32

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Column professor 34

I. Arnold

Column professor 37

P. Franses

FSR News

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FSR former board member 40

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Activity reports 42

FSR Activity Calendar 48

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Table of contents • 5

Relationship Banking: What Do We Know?

A.W.A. Boot

6 • Relationship Banking: What Do We Know?


»

1. INTRODUCTIONThe modern literature on financial intermediation has primarily

focused on the role of banks as relationship lenders. In this

capacity, banks develop close relationships with borrowers

over time. Such proximity between the bank and the borrower

has been shown to facilitate monitoring and screening and

can overcome problems of asymmetric information. In this

view, relationships emerge as a prime source of an incumbent

bank’s comparative advantage over de novo lenders. In recent

years, however, the proliferation of transaction-oriented banking

(trading) and direct funding available in the financial markets

has started to seriously challenge banks’ future as relation-

ship bankers. This has raised a host of interesting theoretical

and empirical questions, the exploration of which has begun

to shape the modern literature on relationship banking that

is briefly reviewed in this paper.

This review is organized around three distinct sets of ques-

tions. First, what defines relationship banking and how

should it be viewed in the context of the modern literature

on financial intermediation? These questions help define the

origin and scope of relationship banking. We know that

information asymmetries are central to the literature on

financial intermediation as developed by Diamond (1984). In fact,

the raison d’eˆtre of banks may well be their role in mitigating

informational asymmetries. Relationship banking is most

directly aimed at resolving problems of asymmetric information.

What is interesting is that this way of looking at relationship

banking takes us beyond the traditional focus on commercial

bank lending; relationships play a critical role in investment

banking as well and in the activities of nonbank financial

intermediaries and private equity and debt markets.

The second set consists of questions about the source of the

benefits of relationship banking. Questions addressed here

include the following: What makes a relationship lender special?

And what are the value-enhancing contractual features of

relationship lending? While answering this we will see that

the free-rider problems (Grossman and Hart, 1980) are

resolved facilitating information reusability over time. This

encourages information production and monitoring by the

lender. The latter question addresses contractual features

that are possibly unique to relationship lending. We show

that relationship banking allows several special contractual

features, including flexibility and discretion, the extensive

use of covenants, and the inclusion of collateral require-

ments. We will show that these contractual features may

facilitate implicit long-term contracts and resolve agency

and information problems.

A third set consists of questions about the “dark side” of rela-

tionship banking (its costs). Is relationship banking especially

vulnerable to soft-budget constraint and hold-up problems?

And how can these problems be resolved? We will argue that

the flexibility of bank debt, in particular the possibilities for

renegotiation, may give rise to perverse ex ante incentives on

the part of borrowers (soft-budget- constraint problem).

Simultaneously, bank funding may lead to an information

monopoly for the bank, giving rise to a hold-up problem. A

potential solution for the soft-budget-constraint problem is

to grant the bank seniority and/or grant it collateral. This

could strengthen the bank’s bargaining position vis-a`-vis

the borrower and facilitate timely intervention. The latter

would benefit bondholders as well and point at a complemen-

tarity between bank debt and capital market funding. Resolu-

tions to the hold-up problem involve introducing competition

to mitigate the bilateral monopoly of the incumbent bank

with respect to the borrower. While introducing ex post com-

petition (e.g., by choosing for multiple simultaneous bank

relationships) may indeed reduce the hold-up problem, the

viability of relationship banking may suffer. In this context,

we also discuss particular contractual solutions that attenuate

the hold-up problem by limiting the discretion of the lender

(Von Thadden, 1995).

2. RELATIONSHIP BANKING IN THE CONTEXT OF THE MODERN THEORY OF FINANCIAL INTERMEDIATIONCommercial banks hold nonmarketable or illiquid assets that

are funded largely with deposits. There is typically little

uncertainty about the value of these deposits, which are often

withdraw able on demand. The liquidity of bank liabilities

stands in sharp contrast to that of their assets, reflecting the

banks’ raison d’eˆtre. By liquefying claims, banks may facilitate

the funding of projects that might otherwise be infeasible. In

financial intermediation theory, this is referred to as qualita-

tive asset transformation (see Greenbaum and Thakor (1995)):

a bank manages and absorbs risks (e.g., credit and liquidity

risks) by issuing claims on its total assets with different char-

acteristics from those encountered in its loan portfolio. The

banks’ assets are illiquid largely because of their information

Relationship Banking: What Do We Know? • 7

sensitivity. In originating and pricing loans, banks develop

proprietary information inhibiting the marketability of loans

(Bhattacharya and Thakor, 1993). Subsequent monitoring of

borrowers yields additional private information. The access

to information is inherently linked to relationship banking

and may point to a comparative advantage of banks.

We define relationship banking as the provision of financial

services by a financial intermediary that:

i. invests in obtaining customer-specific information, often

proprietary in nature; and

ii. evaluates the profitability of these investments through

multiple interactions with the same customer over time and/

or across products.

This definition centers around two critical dimensions: pro-

prietary information and multiple interactions. The definition

emphasizes that relationship banking involves borrower-spe-

cific—often proprietary—information available only to the

intermediary and the customer. This information is acquired

through screening and/or monitoring services, which can be

reused. In contrast, transaction-oriented banking focuses on

a single transaction with a customer, or multiple identical

transactions with various customers. In general, this means

that three conditions are met when relationship banking is

present (see Berger (1999)):

i. The intermediary gathers information beyond readily available

public information;

ii. Information gathering takes place over time through multiple

interactions with the borrower, often through the provision

of multiple financial services;

iii. The information remains confidential (proprietary).

Two caveats are in order. Relationship banking may also

include things that nonbank financial intermediaries do.

That is, in the context of lending, relationship lending is not

the exclusive domain of banks. For example, investment

banking facilitate more than transactions e.g, underwriting

public issues and assessments of credit and/or placement

risks.

Such activities move an investment bank’s role close to that

of a commercial bank engaged in lending; the processing and

absorption of risk may be facilitated by the proprietary infor-

mation and multiple interactions that are the hallmarks of

relationship banking. The full menu of financing options for

borrowers includes many other products with varying

degrees of relationships. With syndicated loans the lead bank

has a relationship with the borrower. Moreover, relationships

are important in the private equity and private debt markets

The upshot of this discussion is that the economic services

typically included as part of relationship banking are often

provided by a variety of nonbank financial intermediaries as

well. The more appropriate term to use then would be rela-

tionship intermediation. Because of the greater familiarity

people have with the term “relationship banking,” however,

we will continue to use this more commonly used term.

The second caveat is that relationship banking does not

involve only funding but includes also various other financial

services, e.g., letters of credit, deposits, check clearing, and

cash management services. The information that banks

obtain by offering multiple services to the same customer

may be of value in lending (Degryse and Van Cayseele, 2000).

Issues such as firm’s loan repayment capability can be

assessed. Thus, the scope of the relationship may affect the

bank’s comparative advantage in lending.

These arguments also put modern developments such as

securitization in the right context. Securitization is an inno-

vation in funding technology that some have characterized

as a proliferation of transaction-oriented market financing at

the expense of relationship-oriented bank lending. The eco-

nomics of securitization dictate that the originating bank

credit enhance the issue. Credit enhancement is typically

achieved through the provision of excess collateral or with a

letter of credit or other back-up facilities.

Alternatively, the originating bank keeps a portion of the

issue or sells the issue with implicit recourse (e.g., backed by

its reputation). The credit enhancement reduces the riskiness

of the asset-backed claims from the investors’ perspective,

and more importantly, it addresses conflicts of interest

rooted in the originating bank’s proprietary information.

With private information in possession of the originating

Relationship banking is most directly aimed at resolving problems of asymmetric information.



»

bank, the market requires assurance that the bank will not

exaggerate the quality of the assets it seeks to sell. As with a

warranty in product markets, credit enhancement discourages

misrepresentation by requiring the originator to absorb a

portion of the losses owing to default. Similarly, credit

enhancement signals to the market that the originator will

perform a thorough credit evaluation and an undiminished

monitoring effort.

Thus relationship banking does have a distinct added value.

They originate and service assets, while also processing the

attendant risk in order to sustain these activities. Banks will

therefore continue to screen and monitor borrowers, design

and price financial claims, and provide risk management ser-

vices. The competitive advantage of banks arising from their

proprietary information about their customers will be pre-

served, as will be the value of relationship banking.

3. HOW DOES RELATIONSHIP BANKING ADD VALUE?The first benefit is relationship banking can facilitate a

Pareto-improving exchange of information between the bank

and the borrower. With relationship banking, a borrower

might be inclined to reveal more information than in a trans-

action-oriented interaction and the lender might have

stronger incentives to invest in producing information. The

other benefit is related to the fact that relationship banking

accommodates several special contractual features that can

improve welfare:

i. Relationship lending leaves room for flexibility and discretion

in contracts that permits the utilization of subtle, non-con-

tractable information, thereby facilitating implicit long term

contracting.

ii. Relationship lending may include extensive covenants that

allow for a better control of potential conflicts of interest.

iii. Relationship lending may involve collateral (e.g., as in

asset-based lending) that needs to be monitored. In fact, the

need for such lending and monitoring may make the proximity

of a relationship financier essential; otherwise, lending might

not occur at all.

iv. Relationship lending could permit the funding of loans that

are not profitable for the bank from a short-term perspective

but may be profitable if the relationship with the borrower

lasts long enough. As we shall see, the reason for this is that

long relationships make possible value-enhancing intertem-

poral transfers in loan pricing.

The first benefit related to information exchange is the

release of proprietary information to the bank that would not

have disseminated to the market (Bhattacharya and Chiesa,

1995). The bank keeps competitive information confidential.

The adverse selection problem is resolved as banks are indis-

pensable in overcoming problems of asymmetric information

A bank might also have better incentives to invest in infor-

mation production about the borrower because of its role as

an enduring and dominant lender. The high costs outweigh

the valuable intertemporal information that is reused accom-

panying a long relationship with the borrower.

The benefits related to the contractual features that relation-

ship lending accommodates are linked to the flexibility that

relationship banking can offer. The bank–borrower relation-

ship is typically less rigid than a capital market funding

arrangement, in the sense that renegotiation of contract

terms is easier. This greater flexibility with relationship

finance can improve welfare because discretion has value

(e.g., Boot et al., 1993). This is part of the important ongoing

discussion in economic theory about rules versus discretion,

where discretion allows decision making based on more

subtle—potentially non-contractable—information. A bank–

borrower relationship is in many ways a mutual commit-

ment based on trust and respect. This may allow implicit—

non-enforceable—long-term contracting with a bank in

circumstances in which information asymmetries and the

non-contractability of various pieces of information would

rule out long-term access to alternative capital market fund-

ing sources as well as explicit long-term commitments by

banks. Therefore, both the bank and the borrower may real-

ize that their relationship produces value unattainable

through other means and thus should be fostered.

Another contractual benefit of relationship banking is

directly related to the structure of the explicit contracts that

banks can write. Bank loan contracts include extensive cov-

enants to guide the bank–borrower relationship. Covenants

help control potential conflicts of interest and reduce agency

costs, which can be renegotiated. This is dependent of the


bargaining position of the bank vis-a`-vis the borrower,

which in turn may depend on the seniority of bank debt. In

reality, bank loans are often senior to other debt. With sen-

iority, a bank is likely to become less willing to renegotiate in

a way that requires it to relinquish a portion of its claim. The

reason is that the more senior the bank’s claim is, the less

sensitive its value will be to the total value of the firm. This

will weaken the bank’s incentive to give in to a reduction in

the size of its claim in the hope of increasing its value

through an increase in total firm value.

The next contractual issue is that bank loan contracts can

easily accommodate collateral requirements. An extensive

theoretical literature shows that collateral can mitigate

moral hazard and adverse selection problems in loan con-

tracting (see Chan and Thakor, 1987). However, collateral is

likely to be effective only if its value can be monitored (see

Rajan and Winton, 1995). The monitoring of pledged collat-

eral might crucially depend on the proximity between bank

and borrower that comes with relationship banking.

The final contractual issue is the smoothing of contract

terms, including losses for the bank in the short term that is

recouped later in the relationship. Research supporting that

credit subsidies reduce moral hazard problems and informa-

tion frictions that banks face in lending to such borrowers

(Petersen and Rajan, 1995). However, subsidies impose losses

on the bank. If losses expected to be offset by rents in the

future then funds could be granted. The point is that without

access to subsidized credit early in their lives, de novo bor-

rowers would pose such serious adverse selection and moral

hazard problems that no bank would lend to them. Relation-

ship lending makes such subsidies and accompanying loans

feasible because the proprietary information generated

during the relationship produces rents for the bank later in

the relationship and permits the early losses to be offset.

The arguments so far focus on distinct benefits coming from

relationship lending, and may explain why bank loans and

other private debt type arrangements play an important role

in funding corporations. What has not been emphasized is

the potential complementarity between bank loans and

public debt funding sources. Hoshi et al. (1993) show that

bank lending exposes borrowers to monitoring, which may

serve as a certification device that facilitates simultaneous

capital market funding. However, Diamond (1991) shows

that borrowers may want to borrow first from banks in order

to establish sufficient credibility before accessing the capital

markets. Again banks provide certification and monitoring.

Once the borrower is “established,” it switches to capital

market funding. There is a sequential complementarity

between bank and capital market funding. A positive correla-

tion is shown between the value of relationship banking and

the quality of the lender (Chemmanur and Fulghieri, 1994).

The overall conclusion is that relationship lending can pave

the way for more informative credit-contracting decisions

based on a better exchange of information, and also increase

the availability of credit to information-sensitive borrowers.

But, as we discuss in the next section, relationship banking

has its costs as well.

4. WHAT ARE THE COSTS OF RELATIONSHIP BANKING?There are two primary costs of relationship banking: the soft-

budget constraint problem and the hold-up problem. Con-

sider the soft-budget constraint problem first. The key ques-

tion is whether a bank can credibly deny additional credit

when problems arise. That is, a borrower on the verge of

defaulting may approach the bank for more credit to forestall

default. While a de novo lender would not lend to this bor-

rower, a bank that has already loaned money may well decide

to extend further credit in the hope of recovering its previous

loan. The problem is that borrowers who realize that they

can renegotiate their contracts ex post like this may have

perverse incentives ex ante (Bolton and Scharfstein, 1996;

Dewatripont and Maskin, 1995). That is, if renegotiation of a

loan agreement is too easy, a borrower may exert insufficient

effort in preventing a bad outcome from happening. Granting

seniority to the bank may provide amelioration. If the bank’s

debt claim is the most senior, it can more credibly intervene

in the decision process of the borrower when it believes that

its interests are in danger. Why? Consider the following

example. Suppose the bank believes that the firm’s strategy is

flawed, or that a restructuring is needed. Can the bank inter-

vene? This is not obvious because the borrower can be con-

vinced that the bank will not enforce its demands. For example,

the bank could threaten to call the loan, but the borrower—

anticipating adverse consequences not only for itself but also

for the value of the bank’s claim—realizes that the bank may

not want to carry out such a threat. This is because carrying



Thus relationship banking does have a distinct added value.

out the threat adversely affects the value of the bank’s (risky) claim on the borrower; thus, sub-

game perfection is violated. However, when the bank has seniority, the senior claim can insu-

late the bank from these undesirable consequences, because the value of this claim is less sen-

sitive to the firm’s total value and hence the bank’s action. It could now credibly threaten to call

the loan, and this threat helps in imposing its wishes upon the borrower. This argument shows

that seniority of bank debt may facilitate timely intervention.

One could ask whether it is really necessary to give the bank this role. Why not allocate the task

of timely intervention and the necessary seniority to bondholders?

Observe that bondholders are subject to more severe information asymmetries because they

are not specialized in screening and monitoring to the same extent as the bank and are gener-

ally more dispersed (i.e., have smaller stakes, which causes free-rider problems). Bondholders

may thus find it optimal to grant bank debt priority over their own claims, and in doing so, del-

egate the timely intervention activity to the bank. Consequently, the borrower may reduce its

total funding cost by accessing both the bank-credit market and the financial market. This is

another example of the complementarity between bank financing and capital market funding.

The next issue is the hold-up problem, possibly another dark side of relationship banking. The

proprietary information about borrowers that banks obtain as part of their relationships may

give them an information monopoly. In this way, banks could charge (ex post) high loan inter-

est rates (see Sharpe (1990) and Rajan (1992)). The threat of being “locked in,” or information-

ally captured by the bank, may make the borrower reluctant to borrow from the bank. Potentially

valuable investment opportunities may then be lost. Alternatively, firms may opt for multiple

bank relationships. This may reduce the information monopoly of any one bank, but possibly at

a cost. Ongena and Smith (2000) show that multiple bank relationships indeed reduce the

hold-up problem, but worsen the availability of credit. One explanation is that multiple relation-

ships can reduce the value of information acquisition to any one individual bank (see Thakor

(1996)) or cause too much competition ex post, which may discourage lending to “young”

firms (see our discussion in Section 5.1).

Von Thadden’s (1995) contribution shows that a long-term line of credit with a termination

clause can balance the costs and benefits of the hold-up problem and the effects of ex post com-

petition. More specifically, such a line of credit generally stipulates that the lender may termi-

nate the lending relationship but, if it chooses to continue it, it should do so at prespecified

terms. This combination of a termination clause—which generates the hold-up problem in the

first place—and continuation only at prespecified terms gives the lender limited bargaining

power. In this way, the severity of the hold-up problem can be optimally managed and multiple

bank relationships may not be needed.

5. COMPETITIVE ISSUES AND EMPIRICAL EVIDENCE

5.1. Competitive IssuesWe have argued that relationships may facilitate a continuous flow of information between

debtor and creditor that could guarantee uninterrupted access to funding. Some, however, »Relationship Banking: What Do We Know? • 11

believe that more competition threatens these relationships, while others have recently argued

the exact opposite. The question then is: how does elevated interbank competition or more

intense competition from the financial market affect relationship banking?

Let us first consider the viewpoint that more competition means less relationship banking. The

argument here is that with more competition borrowers might be tempted to switch to other

banks or to the financial market. When banks anticipate a shorter expected lifespan of their

relationships, they may respond by reducing their relationship-specific investments. Interest-

ingly, shorter or weaker relationships may then become a self-fulfilling prophecy.

A complementary negative effect of competition on relationship banking may come from the

impact of competition on the intertemporal pricing of loans. Increased credit market competi-

tion could impose constraints on the ability of borrowers and lenders to share surpluses inter-

temporally. In particular, it becomes more difficult for banks to “subsidize” borrowers in earlier

periods in return for a share of the rents in the future. Thus, the funding role for banks that

Petersen and Rajan (1995) see in the case of young corporations—see the discussion in Section

3—may no longer be sustainable in the face of sufficiently high competition. This indicates

that excessive interbank competition ex post may discourage bank lending ex ante. An alterna-

tive view is that competition may also elevate the importance of relationships as a distinct com-

petitive edge. Pure price competition pressures bank profit margins. Boot and Thakor (2000)

show that a relationship orientation can alleviate these competitive pressures because a rela-

tionship banking orientation can make a bank more unique relative to competitors. Thus, a

more competitive environment may encourage banks to become more client-driven and cus-

tomize services, thus focusing more on relationship banking.

5.2. Empirical EvidenceThe costs and benefits of relationship banking have been subjected to extensive empirical aca-

demic scrutiny. There is an announcement effect of bank loan agreements on stock prices

(James (1987) and Lummer and McConnell (1989)) suggesting the special role of banks. Based

on supporting studies we can conclude that bank involvement has a distinct added value.

Though the sources of value-added are not uncovered but it is shown that the existence of a

bank–borrower relationship increases firm value. The strength of a bank– borrower relation-

ship, measured by the duration of the bank–lender relationship, has provided several interesting

insights. First, the duration of the bank–borrower relationship positively affects the availability

of credit (Petersen and Rajan, 1994; Berger and Udell, 1995). Second, contract terms generally

improve for the borrower over the life of the relationship: interest rates and collateral require-

ments fall. These results are consistent with the idea that relationship banking lubricates

value-enhancing exchange of information and that the longer the duration of the relationship,

the greater the information exchange. Third, there is evidence of intertemporal smoothing of

contract terms that could also contribute to the increased availability of funds to “young” firms

(Petersen and Rajan, 1994, 1995).

The improvement in contract terms over the relationship is possibly evidence against the hold-

up problem, since this problem should worsen credit terms over time. This does not mean that

the hold-up problem is absent, but rather that it is dominated by other factors. Interestingly, in



In particular, existing empirical work is virtually silent on identifying the precise sources of value in relationship banking.

the European context, Degryse and Van Cayseele (2000) find

the opposite: contract terms deteriorate with longer duration

of the relationship suggesting that the hold-up problem is

more dominant in Europe. One explanation might be that

the banking sector in Europe is more consolidated and fewer

credit alternatives exist for borrowers (e.g., the financial

markets are less developed). Kracaw and Zenner (1998) of-

fer an alternative explanation: they show that “interlocking”

directorships—quite prevalent in Europe—between banks

and firms may intensify hold-up problems. Other empirical

research has explicitly looked at resolutions to the hold-up

problem. One solution is that firms opt for multiple bank

relationships. Ongena and Smith (2000) show that this may

indeed reduce the hold-up problem, but can worsen the

availability of credit. A plausible explanation is that the pres-

ence of multiple relationships reduces the value of informa-

tion acquisition to any one individual bank. Alternatively, the

presence of multiple lenders causes “too much” competition

ex post that can discourage lending to young firms (Petersen

and Rajan, 1994). Houston and James (1999), following

Hoshi et al.’s (1990) work on cash flow constraints and invest-

ment, refine these arguments by focusing on the size of the

anticipated funding needs. They show that the desirability of

multiple bank relationships crucially depends on these funding

needs. Their empirical evidence indicates that firms with a

single bank are at a disadvantage (“cash flow constrained”)

only when large funding needs are anticipated. In the case of

more modest funding needs, single bank firms are less cash

flow constrained than firms with multiple bank relations are.

The discussion in this section gives substantial evidence in

support of the hypothesis that relationship banking adds

value. An importan t next step is to design empirical tests

that can differentiate between the various costs and benefits.

In particular, existing empirical work is virtually silent on

identifying the precise sources of value in relationship bank-

ing.

6. CONCLUSIONRelationship banking has become an important area of scien-

tific inquiry. This review has focused primarily on the theo-

retical contributions but has also added key empirical

insights. The general conclusion is that relationship banking

has a distinct role to play and can be a value-enhancing inter-

mediation activity. Much more research is needed, however.

Existing work falls short in that it has not measured the precise

sources of the added value of relationship banking. In the

increasingly competitive environment of banking, the differ-

entiation of distinct costs and benefits (and the empirical veri-

fication of it) is crucial in order to predict the viability and

scale of relationship banking in the future.

Of great importance is also the effect of the restructuring in

the financial services industry on the viability of relationship

banking. How does bank consolidation affect relationship

banking? The empirical research so far has focused on small

business lending and finds that mergers and acquisitions

involving at least one large bank reduce lending to small

businesses, whereas mergers and acquisitions between small

financial institutions have a positive impact on small business

lending (see Berger (1999)). We need to understand what

explains these results. On an even more general level we

would like to disentangle the advantages and disadvantages

of bank-based systems (e.g., Germany) and market-based

financial systems (the Anglo-Saxon countries). The focus of

this review on understanding the costs and benefits of rela-

tionship banking is undoubtedly helpful for this evaluation.

But the relative importance of the various costs and benefits

of relationship banking may differ between bank-based and

market-based systems. For example, the empirical evidence

presented in Section 5.2 points at potentially more severe

hold-up problems in banking in Europe than in the US.

These advances are promising, but cannot hide the fact that

even at a fairly basic level, we are just beginning to learn

about the real benefits of bank-customer relationships. Sub-

stantial ambiguity remains. As one banker recently put it:

“you may think that you have a relationship, but the customer

may consider it an annoying sequence of transactions.”


Competition and Relationship Lending: Friend or Foes?

By A.F. Presbitero and A. Zazzarro

14 • Competition and Relationship Lending: Friend or Foes?


1. IntroductionTo this date, the European Union (EU) has not been successful

in implementing any serious cooperation or harmonization

in corporate taxation. The European Commission (EC)

already called for a harmonization of corporate tax systems

in the 1960’s. Subsequently the European Parliament (EP)

has produced several Working Papers on the subject of tax

coordination.

Research indicates that full tax harmonization would yield

the biggest welfare gain. However, the burden on national

sovereignty would suggest it unlikely to be implemented in

the EU as a whole. An Enhanced Cooperation Agreement

(ECA) enables the most ambitious Member States (MS) to

deepen cooperation between themselves. This might be the

only way to achieve full harmonization amongst the more

willing MS. Therefore, our research addresses the following:

will the introduction of a European Union Corporate Income

Tax, based on an Enhanced Cooperation Agreement, lead to

an increase in welfare within the participating MS and

thereby create incentives for other MS to join at a later time?

In section 2 we will shortly address the characteristics of the

Common Consolidated Corporate Tax Base (CCCTB) and the

European Union Corporate Income Tax (EUCIT). Then, in

section 3 we will give a clear explanation of the distinctive

characteristics of an ECA. Section 4 will give an understanding

of the existing studies on the implementation of the CCCTB

amongst all or a subgroup of MS and the implementation of

the EUCIT. It also addresses the possible Enhanced Cooperation

Union for Corporate Taxation (ECUCT). Section 5 concludes.

2. Possible reformsCorporate taxation in Europe has been the focus of the EC for

several years. In the 2001 EC Report on Company Taxation in

the Internal Market, the Commission indicated various company

tax obstacles prevailing in the EU, such as: high compliance

and administrative costs and the distortion of the international

allocation of capital. To a large extent, these shortcomings of

the current system originate from the co-existence of 27

different tax systems, which requires separate tax accounting

for every MS where a company operates. To reduce these

obstacles, the EC has been researching the possibility of

harmonizing the corporate tax systems in the EU.

The most developed concept of harmonization is referred to

as the CCCTB. Under this system, the EU-wide consolidated

profits of each multinational company (MNC) will be allo-

cated to MS by an apportionment formula. Companies that

are eligible and opt in, would then be taxed on their consoli-

dated taxable profits earned across the different MS. Each

state will subsequently tax the allocated profit at its own cor-

porate tax rate. Under the CCCTB, the compliance and

administrative costs of MNC are reduced, it leads to an alle-

viation of double taxation and it opens up the possibility of

cross border loss compensation. However, the precise impact

on welfare and revenues of a MS strongly depends on the

choice of the apportionment formula. It will certainly be difficult

to agree upon the CCCTB amongst the 27 MS, especially in

view of the unanimous voting requirement on direct tax matters.

Another possibility is implementing the EUCIT. This system

replaces all the corporate income taxes within the EU and

thus leads to base and rate harmonization. This necessitates

that countries lose their sovereign rights on corporate tax

matters altogether. It will, however, lead to a truly “single

level playing field”.

3. Enhanced Cooperation AgreementTo reduce tax competition there is an ongoing plea for estab-

lishing a single corporate tax zone. As direct taxation is still

subject to unanimous voting in the European Council, not

much progress has been made. The EU has reacted to these

developments by introducing a so-called Enhanced Coopera-

tion Agreement (ECA). An ECA is a procedure wherein a

minimum of nine EU MS are allowed to establish advanced

integration or cooperation in an area within EU structures,

but without the other EU members actually being involved.

Hence, an ECA enables the most ambitious MS to deepen

cooperation between themselves. The option of an ECA

amongst a subgroup could facilitate progress in integration,

as not all MS might be willing or able to participate in it yet.

A successful performance of such a subgroup may motivate

other MS to participate in the ECA at a later stage.

4. Conclusions and coordination effect of the CCCTB and the EUCIT

Looking at the research done, it is shown that corporate tax

base harmonization yields a welfare gain for Europe, though

small. Amongst the individual MS it gives very different

Our research hypothesis is that what prevails between the investment and the strategic theories of relationship lending depends on the organizational structure of the local banking system

»Competition and Relationship Lending: Friend or Foes?• 15

results, some will benefit while others will not. The simulations ignore the reduction of com-

pliance costs, which are expected to increase welfare gains even more.

The CCCTB proposal consists of an optional common tax code, besides the existing national tax

codes. As it would be optional, differences in treatment would remain. Under full consolidation

of the tax base, profit shifting within the EU is no longer feasible. However, multinationals can

still respond to tax rate differentials that might create incentives to reallocate. This implies that

tax competition does not disappear under consolidation, but will take a different form and it

may even cause further competition in tax rates in the EU. This offers a rationale for rate har-

monization, in addition to base harmonization. Also profit shifting to low-tax countries that are

not part of the EU will still be possible, which means that the individual EU MS will have to

maintain separate accounting for profits earned outside the EU. Therefore the amount of cost

reduction under the CCCTB may be overestimated.

By implementing the EUCIT system, which is mandatory and includes rate harmonization,

some of the distortions caused by the CCCTB are eliminated. The welfare gain under the EUCIT

is much larger in comparison to the welfare gain under the CCCTB system.

CCCTB and EUCIT have the same problems of arriving at a common tax code. A whole new tax

system would have to be devised. Furthermore, as the EUCIT is compulsory, this necessitates

that countries lose their sovereign rights on corporate tax matters altogether.

Although it seems unlikely that harmonization will be implemented in all 27 EU MS simulta-

neously, a small group of MS may find it in their interest to do so under an ECA. A coalition of

winning countries reduces the welfare gain and may induce a process of adverse selection,

which destroys the possibility of cooperation. Furthermore, a coalition of similar countries (in

terms of the size of their multinational sector) is more feasible in achieving agreement and is

actually preferred by those countries over a EU-wide reform. Countries with similar policies are

more likely to form a coalition, as the costs of cooperation are relatively minimal. Another

example of a coalition is one between larger countries. This yields larger common gains from

cooperation compared to a coalition between small countries, since the spillovers internalized

by a coalition of small countries are much smaller than spillovers internalized by larger countries.

Moreover, small MS may prefer to remain sovereign as they benefit more from tax-rate cuts.

These simulations are based on the compulsory CCCTB regime. Although the consequences for

individual MS under full harmonization most likely will not correspond to the CCCTB simula-

tions, it remains clear that for Europe as a whole, the EUCIT is more beneficial. Therefore it

seems probable that under the EUCIT a group of countries will benefit from an ECA without

having a significant effect for the opt-outs. Although it is possible that this group would be similar

to the ones examined in the studies, this cannot be said with the utmost certainty. Further

research is necessary.

Following the ECA an Enhanced Cooperation Union for Corporate Taxation (ECUCT) can be

formed. Such an ECUCT could have possible positive or negative pulling-effects on the opt-outs.


16 • Competition and Relationship Lending: Friend or Foes?

The opt-outs can benefit from the experimentation and learn the pros and cons of cooperative

tax harmonization by the ECUCT members. The possibility that enhanced cooperation in one

field, by one group of countries, will extend to other areas and will thus benefit other countries,

has already been put forward by a number of authors. Cross-border economic activities within

the ECUCT are expected to increase with harmonization. If cross-country differences in effective

tax rates would be removed this will lead to a more efficient allocation of capital across the

ECUCT, creating an incentive for countries to be a part of the ECUCT. In case lower compliance

costs yield additional welfare gains, this also increases the likelihood that countries opt in the

system.

One of the fears is that enhanced cooperation may lead to a permanent divide between insiders

and outsiders. Furthermore outsiders can choose explicitly to remain outside the ECUCT for

reasons of tax competition or national tax preferences.

5. ConclusionIn our paper we explored the possibility of a European Union Corporate Income Tax. We started

by shortly addressing the characteristics of the CCCTB and the EUCIT. Secondly, we explained

the possibility of Enhanced Cooperation as it does not seem feasible that all EU members would

agree to one corporate tax system in the near future. After this, we shortly addressed a few studies

of interest to our research and applied this in our argumentation on the European Union Cor-

porate Income tax, more specifically the Enhanced Cooperation Union for Corporate Taxation.

All studies addressed conclude that harmonization, whether by CCCTB or EUCIT, is likely to

produce a welfare gain for Europe, although probably modest. It is acknowledged that not all

countries may benefit. If some countries are worse off, it will be difficult to agree upon harmo-

nization among the EU MS. The biggest gain is expected from a reduction in compliance costs,

which no studies were able to incorporate in their research.

A potential way out is enhanced cooperation whereby a subgroup of EU MS coordinates their

policies. However, a question which remains is whether or not opted out countries could grad-

ually be enticed to participate in closer cooperation at a later stage. This cannot be determined

due to the different results stemming from different factors which should be taken into account

such as which group of countries and the choice of the rates and bases, amongst other factors.

It seems most probable that MS of similar size or with a similar multinational sector will

deepen cooperation, since they will have similar tax systems. We expect that MNC will prefer to

be allocated within the ECA due to the reduction in compliance costs and other benefits men-

tioned in our paper, which will create an incentive for the opt outs to join the ECA.

As a final remark it is relevant to inform the reader that as of the 16th of March 2011 the Euro-

pean Commission has published its long awaited draft directive of the optional CCCTB.

Although the reader knows our standing point on this proposal, it could be a stalking horse for

closer tax cooperation in Europe.

To establish whether relationship lending can survive competition is essentially an empirical matter.

Competition and Relationship Lending: Friend or Foes? • 17

Why do firms switch banks?

By Radhakrishnan,G., Udell, G.F., and V. Yerramilli

18 • Why do firms switch banks?


1. IntroductionA large and growing literature in finance shows that firms

benefit from banking relationships. It is argued that these

benefits arise mainly because of the ability of banks to pro-

duce “soft” information – information that cannot be easily

observed by or transferred to outsiders – about their borrowers

that they can use to make future credit decisions (Leland and

Pyle (1977), Fama (1985), Diamond (1984), Diamond (1991),

etc.). Moreover, relationship banks also benefit their borrowers

by smoothing loan prices across multiple loans in response

to interest rate shocks (Berlin and Mester (1998)). In practice,

however, it is very common for firms to switch to new banks

for their repeat loans (i.e., their continuing credit needs). We

find that 44% of the repeat loans in our sample of bank loans

involve new bank-borrower relationships. Given the documented

benefits of relationship lending, it is curious as to why firms

switch banks so often. In this paper, we address this question

using an extensive data set of 30,466 loans originated by 850

banks to 13,788 borrowers in the United States.

Existing literature highlights a few potential reasons for why

firms may switch banks. It is argued that small and large

banks possess unique strengths and may potentially specialize

in lending to different classes of borrowers (Berger et al.

(2005), Kano et al. (2006)); small banks have a better ability

to process soft information and are more likely to lend to

informationally problematic borrowers, while large banks

specialize in syndicated lending to larger firms. Similarly,

borrowing firms too differ in terms of how they access bank

financing (Hadlock and James (2002)); firms with severe

asymmetric information problems are more likely to choose

bank loans. So it is possible that firms enter into new banking

relationships with different classes of banks in response to

their changing borrowing needs, changing information quality,

etc. Bank-borrower relationships are also under constant

threat from competing lenders that may provide a superior

product or a lower price (Petersen and Rajan (1995) and Boot

and Thakor (2000)). Thus increased competition may also

result in firms switching banks. Firms may also switch banks

due to changes at their existing relationship bank such as

mergers, restructuring etc. We examine the influence of

firm, bank and bank market characteristics on a firm’s pro-

pensity to switch to a new bank to distinguish between these

theories.

We obtain our loan data from the Reuters Loan Pricing Cor-

poration’s (LPC) Dealscan database. Dealscan provides detailed

loan information, including the identity of the borrower and

the lender, for loans raised over a sufficiently long period of

time (1986–2005), allowing us to analyze how lending rela-

tionships evolve over time. We define relationships as

between the borrower and the lead lender in a syndicate. This

is because prior research has shown that the lead lender is

the one responsible for monitoring borrowers. We examine

firms’ repeat loans, and our main variable of interest is

whether a firm switches to a new lead lender for its repeat

loan or not. We combine the loan data with firm-level data

from Compustat and bank-level1 data from the Call Reports

to analyze how firm characteristics and bank characteristics

influence the firm’s decision to switch to a new bank for its

repeat loan.

To summarize, while most of the empirical literature has

tried to highlight the benefits of lending relationships, by

focusing on the determinants of lending relationships, we

highlight both the benefits and costs of lending relation-

ships. While lending relationships can benefit opaque bor-

rowers by enabling banks to reuse soft information, our

paper highlights that there are attendant costs too, especially

if the existing relationship is with a small bank that may not

be able to meet a firm’s growing borrowing needs. The benefits

of borrowing from relationship banks may dominate the

costs for the very small and informationally opaque borrowers,

such as the small non-Compustat firms in our sample. How-

ever, information considerations do not prevent larger firms

– many of which are traded publicly, have debt ratings and

are tracked by financial analysts – from switching to new

banks. For these firms, the borrowing constraints with current

relationship banks outweigh the information benefits of con-

tinuing current relationships. This, we believe, is the main

contribution of our paper to the literature on lending rela-

tionships.

1.1 HypothesesOur primary objective is to determine why firms switch to

new banks for their repeat loans, instead of sticking to the

banks that they have borrowed from the in the past, i.e., their

relationship banks. We analyze how this decision is influ-

enced by firm characteristics, bank characteristics, and bank

market characteristics.

The benefits of borrowing from relationship banks may dominate the costs for the very small and informationally opaque borrowers, such as the small non-Compustat firms in our sample

»Why do firms switch banks? • 19

(Berger et al. (2005)). So as firms grow and their information

environment improves, they are more likely to want to build

new relationships with larger banks in order to better meet

their changing needs for credit and other capital market ser-

vices. This can be viewed as a”graduation hypothesis” similar

to firms graduating to more reputable investment banks,

auditors, etc. (see Krigman et al (2001) for instance). The

graduation hypothesis suggests that firms that do not have

existing relationships with large banks are not only more

likely to switch banks, but are also more likely to switch to a

large bank to increase their credit capacity. However, since

small banks are likely to have an advantage in lending to

opaque borrowers, this effect should be less pronounced for

the informationally opaque firms.

A firm’s decision to switch to a new bank could also be influenced

by bank market characteristics such as market size, level of

concentration, etc. Since large and small banks populate different

markets, the graduation hypothesis would predict that firms

are more likely to switch from small, non-metropolitan bank

markets to large, metropolitan bank markets. Since banking

relationships are more likely to endure in concentrated

banking markets (Petersen and Rajan (1995)), the probability

of a firm switching to a new bank should be higher if the firm’s

existing banks are in competitive bank markets.

The decision of a firm to switch to a new bank could also be

driven by other supply side factors like merger and acquisition

activity involving existing banks, deposit growth at banks, etc.

It is possible that following a merger, the consolidated banking

entity is unwilling or unable to service some of its existing

borrowers, forcing them to switch to other banks (Berger et

al. (1998)). Further, since small banks have been shown to have

an advantage in lending to firms facing information problems,

we expect the merger effect to be stronger for information-

problematic firms. On the other hand, when a bank experiences

a high deposit growth, it might be more willing to lend to

new firms that it hasn’t lent to in the past. So we expect the

probability of a new bank-borrower relationship to be positively

related to the deposit growth at the new bank. For a similar

reason as outlined above, we expect this deposit growth effect

to be weaker for information problematic firms.

Finally, it is possible that firms switch banks because they

expect to obtain more favorable loan terms than they can

Theoretical literature suggests that if the information

regarding the firm is soft, i.e., if it cannot be easily be

observed by or transferred to outside lenders, then the firm

would benefit by continuing to borrow from its existing rela-

tionship bank. This is because the relationship bank can use

its superior information to make better informed credit deci-

sions than outside banks. So as per this soft information

hypothesis, firms that are informationally opaque should be

less likely to switch to new banks.

To test this hypothesis, we use the firm’s size and the pres-

ence of the firm’s financial information on the Compustat

database to proxy for the firm’s information environment.

The idea here is that the non-Compustat firms, i.e., firms for

which financial information is not available on the Compustat

database, are likely to be more opaque than the Compustat

firms. For firms that are covered by Compustat, we also use

firm age, presence of a credit rating, number of financial analysts

tracking the firm, discretionary accruals and asset tangibility

as additional proxies for the firm’s information quality.

Chemmanur and Fulghieri (1994) argue that a borrower’s

choice of a lender depends on the lender’s reputation for

making the “right” liquidation versus continuation decision

when confronted with firms in financial distress; lenders

acquire such a reputation over time. Their argument sug-

gests that a borrower who is concerned about the possibility

of financial distress would find it optimal to borrow from a

relationship bank, even if such borrowing entails higher

costs. We use a firm’s Altman Z-score8 and leverage as proxies

for the probability of financial distress to test if firms closer

to distress are less likely to switch to new banks.

To promote portfolio diversification, bank regulators impose

lending limits on the extent of exposure to individual bor-

rowers (or related borrowers) based on the size of the bank’s

capital. Many banks self-impose internal lending limits that

are even more stringent than regulator-imposed lending

limits. The presence of such limits implies that as borrower

loan needs increase, they are more likely to want to build

new relationships with larger banks.

Further, recent literature has highlighted that small and

large banks differ in their ability to process soft information,

and may specialize in lending to different classes of borrowers

Smallest and the most opaque firms in our sample, and the largest firms in our sample are least likely to switch to a new bank.



where the subscript i indicates the borrower and the sub-

script t indicates the deal number for a particular borrower.

The dependent variable yit is New Relationship, a dummy

variable that identifies instances when the borrower borrows

from a new lead bank. As mentioned earlier, we estimate this

regression on the 2nd to 4th deal of a borrower in our

sample. We exclude the first deal because we will not be able

construct the variable New Relationship for the first deal, as

there is no past history to compare the borrower-lead

arranger pair with. We also exclude the deals beyond the 4th

deal, because apart from the very large borrowers, very few

borrowers have more than 4 deals in our sample. Non Com-

pustat is a dummy variable that identifies firms for which we

do not have financial data in Compustat, and Size is the loga-

rithm of the firm’s sales, as reported on Dealscan. We use

both Non Compustat and Size as proxies for the firm’s infor-

mation quality, because firms covered by Compustat and

large firms are less likely to suffer from information prob-

lems. We use the additional term Size2 to test whether the

relationship between the probability of switching to a new

bank and size is non-linear. In all specifications, the standard

errors are robust and clustered at individual borrower level.

Overall, the results in Panel A suggest that the most informa-

tionally opaque firms in our sample, i.e., the non-Compustat

firms, are less likely to switch to a new bank for their repeat

deals. This could be because, given that they are opaque, they

benefit by staying with their existing relationship banks.

Alternatively, it could be because they are unable to switch to

new banks, because new banks are unwilling to lend to such

highly opaque firms.

Interestingly, when we use size as an additional proxy for

information quality, we find that not only the smallest firms

but also the largest firms in our sample are more likely to

stay with their existing banks.

Next, we turn our attention to other firm characteristics. In

Panel B of Table III, we repeat the regression on the sub-sample

of borrowers for which we have financial data in the Compustat

database. To measure the information environment of the

firm, we include Log(Assets), the log of the book value of

total assets of the firm. Since larger firms are less likely to

suffer from asymmetric information problems, our hypothesis

would predict a positive coefficient on Log(Assets). We also

obtain from their existing banks. We focus on two important

variables: the loan yield and the loan amount. We expect that

firms switch to new banks because they paid too high a price

on their previous loan, or because they obtained too low an

amount on their previous loan. We also expect that firms that

switched to a new bank obtained a lower yield and/ or a

higher loan amount than those that did not.

2. ResultsWe now proceed to the formal multivariate tests of our

hypothesis. Our results are organized as follows. In Section

2.1, we examine the impact of borrower characteristics on its

propensity to switch to a new bank for its repeat deals. We

document a non-monotonic relationship between a firm’s

information quality and its propensity to switch to a new

bank. We show that the smallest and the most opaque firms

in our sample, and the largest firms in our sample are least

likely to switch to a new bank. In Section 2.2, we examine the

impact of bank characteristics and bank market characteristics

on a firm’s propensity to enter into new banking relation-

ships. We find results that are supportive of the graduation

hypothesis that firms are more likely to switch from small

banks to large banks, and from small bank markets to large

bank markets. Finally, in Section 2.3, we examine the moti-

vations of borrowers in forming new banking relationships.

Our main result is that, after controlling for the endogeneity

in the decision to switch, borrowers that switched to a new

bank obtained higher loan amounts than those that did not.

This finding suggests that firms form new banking relation-

ships in order to escape borrowing constraints at their existing

banks, and offers additional support to the graduation hypothesis.

2.1 Firm characteristics and the propensity to switch to a new bankIn the introduction we had hypothesized that information-

ally opaque firms and firms facing financial distress are more

likely to stay with their existing banks. To test these hypoth-

eses, we begin by examining the impact of firm characteris-

tics on firms’ propensity to enter into new banking relation-

ships. We estimate the following panel model for all the firms

in our sample of repeat deals:

yit = F(_0 + _1Non Compustati + _2Sizei + _3Size2i + Con-

trols), (1) »Why do firms switch banks? • 21

firms, which may be thought of as informationally opaque,

are more likely to stay with their existing banks. Interest-

ingly, however, the soft information hypothesis does not hold

uniformly across the information spectrum. For instance,

among our sub-sample of Compustat firms, we show that

firms that are informationally more opaque (small firms,

firms without a credit rating, firms that are tracked by fewer

analysts) are more likely to switch to new banks, instead of

staying with their existing banks as predicted by the soft

information hypothesis.

2.2 The impact of bank and bank market characteristics on banking relationships

In the introduction, we hypothesized that a firm’s decision to

switch to a new bank could also be influenced by bank char-

acteristics and bank market characteristics. We now examine

how bank characteristics and bank market characteristics

influence firms’ propensity to form new banking relationships.

We begin by estimating regression (1) for the entire sample

of firms, after including bank and bank market characteristics.

We include characteristics of the lead bank for the current

loan, and also the characteristics of the lead banks with

whom the borrower has existing relationships with. The

results of this regression are reported in Panel A of Table IV.

The results in Column (1) confirm our finding that firms are

less likely to switch to new banks if they are already borrowing

from a large bank, and that firms are more likely to switch to a

large bank. The results in Column (2) show that firms are more

likely to switch into larger banking markets and are less likely to

switch banks if they are already borrowing from a large banking

market; similarly the results in Column (3) show that firms are

more likely to switch into markets where large banks have a

greater market share, and are less likely to switch banks if they

are already borrowing from a large-bank dominated market.

These results on the sub-sample of firms with Compustat data

confirm our earlier results obtained on the full sample of firms,

and provide strong support for the graduation hypothesis.

2.2.1 The impact of bank mergersIn Table IV (B), we estimate the impact of a merger involving

the relationship bank on a firm’s propensity to form new

lending relationships. In Column (1) of Table IV (B), we estimate

(1) after including a dummy variable Merger, which takes a

include Industry Leverage, the median leverage among all

firms with the same four digit SIC code as the borrower.

Industry Leverage is likely to measure the expected leverage

of the firm, with a higher value indicating firms that depend

to a greater extent on debt capital. Since firms with higher

leverage ratios are more likely to experience financial distress

in future, our hypothesis that firms facing the probability of

financial distress are more likely to stay with their existing

banks predicts a negative coefficient on Industry Leverage.

R&D/TA is the ratio of R&D expenditure to total assets. This

is likely to measure the fraction of firm value in future

growth options, with a higher number indicating firms that

can benefit to a greater extent from relationships.

The negative coefficient on Log(Assets) in Column (2) indi-

cates that smaller firms are more likely to form new banks

relationships by switching to new banks, while larger firms

are more likely to stick to their existing relationship banks.

This is consistent with the univariate results presented in

Section 1.2, and contradicts the soft information hypothesis

which predicts that firms with poorer information quality

are more likely to stay with their existing relationship banks.

The negative coefficient on Debt Repayment indicates that

loan deals whose main purpose is to repay debt are less likely

to involve new banks. The signs of coefficients on Syndicate

and Long Time Between Deals are as obtained with the full

sample of firms in Panel A.

Overall, the results in Panel B indicate that larger firms,

firms with bond ratings, and firms with a greater analyst fol-

lowing are more likely to repeat relationships while firms

with the opposite characteristics are more likely to enter into

new relationships. Our results are both statistically and eco-

nomically significant, and reject the hypothesis that the

more opaque firms are more likely to stay with their existing

banks. The coefficient in Column (1) indicates that a one

standard deviation increase in firm size, reduces the proba-

bility of switching to a new bank by 8.2%.

To summarize our findings in Table III, we find a non-monot-

onic relationship between a firm’s information quality and its

propensity to form new banking relationships – the most

opaque firms and the most transparent firms in our sample

are least likely to switch to a new bank. Consistent with the

soft information hypothesis, we do find that non-Compustat



impact of firm characteristics, bank characteristics and bank

market characteristics on a firm’s propensity to enter into a

new banking relationship.

We document a non-monotonic relationship between a firm’s

information quality and its propensity to switch to a new bank:

the most opaque firms and the most transparent firms are less

likely to switch to new banks. Using a firm’s total sales as a proxy

for its information quality, we document an inverted U-shaped

relationship between a firm’s information quality and its propen-

sity to switch to a new bank. These findings suggest that while

there are benefits to borrowing from relationship banks, such as

ability to reuse soft information, there are attendant costs as well.

The soft-information benefits may dominate for the very small

and informationally opaque borrowers, such as the small non-

Compustat firms in our sample, while the potential costs may

dominate for the larger firms – many of which are traded publicly,

have debt ratings and are tracked by financial analysts.

We also show that firms that switch banks mainly switch

from small banks to large banks, and from small bank markets

to large bank markets; interestingly, firms that are highly

opaque are not only less likely to switch banks, but are also

less likely to switch to a large bank. Finally, firms that switch

to new banks obtain larger loan amounts than those that do

not. We do not find sufficient evidence to suggest that firms

switch banks in order to obtain a better rate on their loans.

Overall, our results suggest that the main motivation of

firms in forming new banking relationships is to escape bor-

rowing constraints at their existing banks.

Our findings suggest avenues for future research. One possible

avenue is to examine how firms and relationship banks smooth

loan contract terms over repeat interactions. For instance, it

is plausible that firms switch to new banks in anticipation of

long-term future benefits, such as fewer financial constraints,

access to a wider array of banking services, etc.

In other words, the benefits of switching to a new bank might not

be realized immediately following the switch. If this is true, it might

explain why we do not find evidence of lower yields immediately fol-

lowing a switch to a new bank. On the other hand, it is also possible

that banks offer attractive terms to entice new borrowers with the

hope of extracting a higher price in the future. This is an open ques-

tion which we plan to address in our future research.

value 1 if any of the lead banks for a firm’s previous deals

undergoes a merger. The positive coefficient on Merger in

Column (1) indicates that firms are more likely to switch to

a new bank if one of their existing relationship banks under-

goes a merger. This result supports the hypothesis that

mergers destroy bank-borrower relationships.

In Column (2), we repeat the regression after including the

dummy variable, Large Bank Merger, that identifies instances

when the relationship bank that merged was a Large Bank.

We include this term to see if there is any differential impact

of mergers across the bank size spectrum. The results indicate

that the size of the merging bank does not affect the propen-

sity of firms to switch to a new bank, following a merger

involving an existing relationship bank.

In Column (3), we repeat the regression after including interac-

tion terms between Non Compustat and Merger & Large Bank

Merger. The results indicate that firms without Compustat data

do not have any differential propensity to switch banks conse-

quent to mergers involving their relationship banks. In Column

(4), we examine if the borrower’s decision to switch to a new

bank is influenced by the deposit growth at the new bank. We do

this to test our hypothesis that when a bank experiences high

deposit growth, it might be more willing to lend to new firms

that it hasn’t lent to in the past. To test this hypothesis, we

repeat our regression after including Deposit Growth, the rate

of growth of deposits for the current lead arranger during the

quarter preceding the loan origination. The positive sign on

Deposit Growth in Column (4) confirms our hypothesis; new

relationships are more likely after a bank has experienced high

growth in deposits. In Column (5), we repeat the regression in

(4) after including an additional interaction term between Non

Compustat and Deposit Growth. Our intention is to discover if

banks that have experienced high growth in deposits also solicit

informationally opaque firms. The negative coefficient on the

interaction term Non Compustat*Deposit Growth suggests that

that is not the case. Even in the face of high deposit growth,

banks are less likely to solicit Non Compustat firms to form new

relationships.

3. Concluding RemarksIn this paper, we examine the repeat borrowings of firms in

the US private debt market to understand how firms’ banking

relationships evolve over time. Specifically, we examine the

The main motivation of firms in forming new banking relationships is to escape borrowing constraints at their existing banks.

Why do firms switch banks? • 23

Van scriptanttot trainee

w w w.ga a an.nU

KPMG

Recruitment Centre

Laan van Langerhuize 1

1186 DS Amstelveen

(020) 656 7162

[email protected]

www.gaaan.nu

een groep studenten in de afstudeerfase bij elkaar zit,

kun je met elkaar sparren en informatie uitwisselen.

Ook kreeg ik een coach toegewezen die mij wegwijs

heeft gemaakt in de organisatie en waarbij ik met al

mijn vragen terechtkon.

Je krijgt de tijd en mogelijkheden om het bedrijf, de

werkzaamheden en de collega’s te leren kennen.

KPMG organiseert bijvoorbeeld diverse activiteiten

voor scriptanten, zoals de Landelijke Scriptanten

dagen, etentjes, borrels, etc. Daarnaast heb ik via

KPMG kunnen deelnemen aan golflessen en kon ik

binnen een paar maanden mijn GVB halen.”

En nu aan de slag als trainee?

“Ik kijk terug op een geslaagde scriptiestage bij KPMG.

Mijn Master is met succes afgerond en ik heb een

geweldige werkgever leren kennen. Sinds september

werk ik fulltime als trainee; ik ben sindsdien al veel

leuke ervaringen rijker. Ik werk in wekelijks wisselende

teams aan opdrachten voor verschillende bedrijven.

Hierdoor leer je snel veel collega’s kennen en is het

werk erg divers. Mijn scriptie is dus een mooie eerste

carrièrestap geweest en ik kan iedereen dan ook

aanraden om met KPMG kennis te maken en te gaan

voor je scriptie!”

Wil jij ook je scriptie bij KPMG schrijven? Neem dan

contact op met het KPMG Recruitment Centre via

[email protected] of schrijf je in op www.gaaan.nu.

Kijk voor tips op facebook.com/kpmgscriptiecoach.

Stijn van der Heijden (27) heeft zijn scriptie bij KPMG

geschreven en is onlangs gestart als trainee in

Rotterdam. We vroegen Stijn naar zijn stageervaring

en start bij KPMG.

Waarom heb je ervoor gekozen om je scriptie bij

een bedrijf te schrijven?

“Ik heb na mijn Bachelor Economie de Master

Accounting, Auditing and Control gedaan. Tijdens een

inhousedag ontdekte ik de mogelijkheden om je scriptie

bij een groot accountancykantoor te schrijven.

Naast de theoretische kennis die ik in ruim vijf jaar

had opgedaan, wilde ik graag praktijkervaring op

doen. Ik ben daarom alvast op zoek gegaan naar een

potentiële werkgever om daar mijn scriptie te schrijven.”

Waarom KPMG?

“Tijdens mijn studententijd was ik erg actief als

wedstrijdroeier bij ARSR Skadi. Ik zocht een werkgever

waar je mensen vindt met dezelfde drive en passie.

Tijdens mijn kennismaking met KPMG vielen de

gedrevenheid en nononsensementaliteit mij op.

Niet alleen mooie verhalen, maar vooral daden.

Ook de Talentpool van KPMG vind ik erg aansprekend.

Dit houdt in dat je eerst een heel divers klantenpakket

hebt en dat je daarna een keuze maakt voor de sector

waarin je je gaat specialiseren. Voor mij voldoende

redenen om mijn scriptie bij KPMG te schrijven.”

Hoe heb je de scriptiestage ervaren?

“Ik kreeg alle ruimte om mijn eigen plan te trekken.

Zo kon ik het schrijven aan mijn scriptie afwisselen

met het opdoen van praktijkervaring. Doordat je met

“Ik heb een

geweldIge

werkgever

leren

kennen.”

© 2011 KPMG N.V., alle rechten voorbehouden.

-04459_Interview_210x297mm_OF.indd 1 27-10-2011 14:44:29

Van scriptanttot trainee

w w w.ga a an.nU

KPMG

Recruitment Centre

Laan van Langerhuize 1

1186 DS Amstelveen

(020) 656 7162

[email protected]

www.gaaan.nu

een groep studenten in de afstudeerfase bij elkaar zit,

kun je met elkaar sparren en informatie uitwisselen.

Ook kreeg ik een coach toegewezen die mij wegwijs

heeft gemaakt in de organisatie en waarbij ik met al

mijn vragen terechtkon.

Je krijgt de tijd en mogelijkheden om het bedrijf, de

werkzaamheden en de collega’s te leren kennen.

KPMG organiseert bijvoorbeeld diverse activiteiten

voor scriptanten, zoals de Landelijke Scriptanten

dagen, etentjes, borrels, etc. Daarnaast heb ik via

KPMG kunnen deelnemen aan golflessen en kon ik

binnen een paar maanden mijn GVB halen.”

En nu aan de slag als trainee?

“Ik kijk terug op een geslaagde scriptiestage bij KPMG.

Mijn Master is met succes afgerond en ik heb een

geweldige werkgever leren kennen. Sinds september

werk ik fulltime als trainee; ik ben sindsdien al veel

leuke ervaringen rijker. Ik werk in wekelijks wisselende

teams aan opdrachten voor verschillende bedrijven.

Hierdoor leer je snel veel collega’s kennen en is het

werk erg divers. Mijn scriptie is dus een mooie eerste

carrièrestap geweest en ik kan iedereen dan ook

aanraden om met KPMG kennis te maken en te gaan

voor je scriptie!”

Wil jij ook je scriptie bij KPMG schrijven? Neem dan

contact op met het KPMG Recruitment Centre via

[email protected] of schrijf je in op www.gaaan.nu.

Kijk voor tips op facebook.com/kpmgscriptiecoach.

Stijn van der Heijden (27) heeft zijn scriptie bij KPMG

geschreven en is onlangs gestart als trainee in

Rotterdam. We vroegen Stijn naar zijn stageervaring

en start bij KPMG.

Waarom heb je ervoor gekozen om je scriptie bij

een bedrijf te schrijven?

“Ik heb na mijn Bachelor Economie de Master

Accounting, Auditing and Control gedaan. Tijdens een

inhousedag ontdekte ik de mogelijkheden om je scriptie

bij een groot accountancykantoor te schrijven.

Naast de theoretische kennis die ik in ruim vijf jaar

had opgedaan, wilde ik graag praktijkervaring op

doen. Ik ben daarom alvast op zoek gegaan naar een

potentiële werkgever om daar mijn scriptie te schrijven.”

Waarom KPMG?

“Tijdens mijn studententijd was ik erg actief als

wedstrijdroeier bij ARSR Skadi. Ik zocht een werkgever

waar je mensen vindt met dezelfde drive en passie.

Tijdens mijn kennismaking met KPMG vielen de

gedrevenheid en nononsensementaliteit mij op.

Niet alleen mooie verhalen, maar vooral daden.

Ook de Talentpool van KPMG vind ik erg aansprekend.

Dit houdt in dat je eerst een heel divers klantenpakket

hebt en dat je daarna een keuze maakt voor de sector

waarin je je gaat specialiseren. Voor mij voldoende

redenen om mijn scriptie bij KPMG te schrijven.”

Hoe heb je de scriptiestage ervaren?

“Ik kreeg alle ruimte om mijn eigen plan te trekken.

Zo kon ik het schrijven aan mijn scriptie afwisselen

met het opdoen van praktijkervaring. Doordat je met

“Ik heb een

geweldIge

werkgever

leren

kennen.”

© 2011 KPMG N.V., alle rechten voorbehouden.

-04459_Interview_210x297mm_OF.indd 1 27-10-2011 14:44:29

© 2011 KPMG N.V., alle rechten voorbehouden. W W W.GA A AN.NU

Kijk voor meer tips op facebook.com/kpmgscriptiecoach.Of beter nog: schrijf je scriptie bij KPMG.

Scriptietip # 3:

“ Bepaal eerst het raamwerk van je scriptie, dan hebje houvast bij het schrijven.”

EEN INHOUDS-OPGAVE IS HET HALVE WERK

-04445_210x297mm_adv_Scriptanten_alle.indd 3 16-11-2011 13:28:36

Interview with Jeroen ScheelbeekHead of Senior Relationship Banking Wholesale Clients Netherlands

Roija Rasuli and Maaike Lanphen

Jeroen Scheelbeek joined Rabobank in 1997, where he worked in various senior positions in the areas of structured finance, corporate finance and relation-ship banking. Over the last 15 years at Rabobank, Jeroen has been working in an international context on a wide range of structured investment and funding transactions such as leveraged buy-outs, acquisition finance and financial engineering transactions. Jeroen has considerable experience in IPO’s, M&A transactions, complex financings and restructurings.

Prior to joining Rabobank, Jeroen Scheelbeek worked in Corporate Finance for NIBC and Aegon in the Netherlands.

He graduated in Business Economics at the Free University of Amsterdam, specializing in Finance, Accounting, Marketing, and Management & Strategy.

What does relationship banking mean for Rabobank?We attach great value to this function, as it is our aim to be a ‘single point of contact’ for our

clients. The essence of our business is that we not only want to sell individual products, but

want to offer our clients total solutions. In contrast to a few years back, when each department

had its own targets, causing frictions and inefficiencies within our bank and for the client of

course. The switch towards total, integrated, solutions for our clients is an efficient and pro-

ductive way of doing business, increasing our focus towards relationship banking has led us to

enhance our core business even more. It is important to realize that the clients’ interest should

be the main focus and that our solutions should address their needs. Banking is a financial service

and you should always keep in mind that service means to “serve a client”.

Is relationship banking more important for the national or the international level?Our market share and strong position in the Netherlands helps us to benchmark the model for

the international market. First and foremost, it is our aim to be the primary bank for our Dutch

clients; to offer our services to the national locations of our Dutch clientele and offering our

banking network close to them. Secondly, we support these clients in their international

expansion by providing services internationally in 43 countries via over 600 offices.

Due to the increase of capital market funding there is more competition, has this caused relationship banking to be the focal point?These are two distinct things because every service and product business has to deal with com-

petition. In the Netherlands, we have grown rapidly because of our own investments and other

factors such as the distress of some of our competitors. What we have also seen is that other

international banks, which were active in the Netherlands, have started to focus on their core

markets e.g. the German and French banks. Regulations such as Basel III and several governments

require banks to shrink in size. This has implications for the business models of banks which

works accordingly: banks have become more selective in the issuance of credit and critical

focus on core customers has increased, in effect leading customers to look at alternative funding

sources like the capital markets. There is a lot of competition in the latter market for instance

from investment banks, however they focus primarily on very large companies.

How does Rabobank cope with this, Basel III requires banks to shrink but what about the international ambition?We have only a limited influence on international regulations of course so this is something we

simply have to adapt to. But then again, we do not need to grow our balance sheet indefinitely.

In general, a banking sector should have a size that is proportionate to the gross domestic product

of a country. Iceland is a clear example here; the banking sector was a number of times bigger

than the GDP of the country and that caused huge problems. But this does not mean that

Rabobank cannot grow; there are other opportunities to explore. For example, two years ago we

established a US Private Placement team specializing in arranging the issuance of US bonds of

institutional investors e.g. pension funds and insurance firms. This formed a gateway for our

current clientele base to explore other sources of financing. Our solutions based mindset

assures that we can interact with our clients on various levels e.g. by being a broker; connecting

our clients with institutional investors. This is crucial as there will be a ‘threshold’ on the level

bank financing dependent upon the situation, what you see is that there is a shift in financing


26 • Interview

»

tenors and concerned parties. The institutional investors will finance the long-term loans (ten

to up to thirty years) and banks will be providing short-term financing (e.g. up to ten years).

The economic crisis has made banks cautious, how does this affect young and innovative firms that require funding?In the Netherlands, we have a very decentralized organization which means that we offer local

solutions via 139 local member banks that have skilled people, are highly specialized and are

highly autonomous in their decision making processes. This has a lot of advantages, such as

that decisions are made fast and clients can interact with their local banks quickly. However,

due to the current economic circumstances we have to be critical towards new business propo-

sitions. For example, if your business model is highly dependent on the construction industry

or on consumer spending then funding such a model will be discussed and challenged, considering

the current circumstances and economic forecasts. We have a lot of internal research resources,

which we can offer to clients, assisting them to thoroughly analyze their business plans before

switching to the implementation stage. As a bank we are open to new ideas and new clients, but

we also have to protect our clients against suboptimal investments.

Does Rabobank intervene in the budgeting process of a firm? Or its strategy? Taking into account the challenging environment we are in.Firstly, we do not intervene with the budgeting and management processes of our clients,

because that is the responsibility of the client’s management team. Our approach is to test the

strategy and the financial forecasts by our own sector research groups. Besides these sector

analysts, we have our macro economists like the Chief Economist Wim Boonstra who provide

their own views on the world. For example, within the general industries sector, we keep track

of the trends in the market and make forecasts. If a client shows us completely different budgets

that may perhaps be too optimistic, then we enter into a dialogue to try to get a better under-

standing. We will never try to run a business by intervening in the strategic process. But it is

our best intention to share our market intelligence with our clients so that both parties can

reach mutual agreement at a certain stage. However, when we see that both parties have completely

different visions of the business and its prospects, then that may not be the best basis to enter

into a long-term relationship.

Banks are seen as the monitoring tool of firms, very convenient for bondholders of course. But how do you maintain your objectivity? How do you make sure that the relationship with the client does not get too close which may affect the renewal of the loan?As a bank we base our judgments on the information available in the markets. We have teams

that scrutinize the publicly available information. As a trusted professional institution we are

obliged to maintain objective in our judgment at every step. If we would not do so, then our

long-term continuity could be at risk as banking is based on trust.

Do you think it would be good for clients to mandatorily switch from banks for example like what we see in the Big 4 firms Shakeup regulated by the EU?Accounting firms provide regulatory auditing services and commercial advisory services. The

combination of that could have led the EU regulators to decide upon such a rule. But most of

As a bank we base our judgments on the information available in the markets.

Interview • 27

our large corporate clients, among them many listed companies, are already financed by a

group of banks via syndicated loans. This group of banks is composed by our clients and may

vary over time. In other words, our clients already determine with which banks they want to do

business. The introduction of such EU regulation would be of less relevant for banks. Publicly

quoted companies are obliged to provide the details on the credit agreements made with their

banks in their annual reports hence information can be easily retrieved. A company has chosen

its banks for various reasons but it always has the freedom to switch bank, so such mandatory

‘shakeup’ would not be necessary for the bank sector.

Is it important to have a long-term relationship with your clients?Yes, we strive for a long-term relationship, as we believe that in order to understand and offer

tailor made integral solutions a long-term vision is required. There may be situations when a

client is going through a difficult year, at those moments only long-term relationships, based

on a thorough understanding, work well. Some of my clients are in the semi-conductor industry,

which has a very volatile and complex business model that requires a deep understanding of the

markets with a strong sense of commitment. At Rabobank, we aim to build relationships with

a long-term vision.

But can a relationship be based on a ‘click’ or do you judge by looking at the potential of a firm?As mentioned earlier, we aim for long-term relationships and strive to maintain those. Of

course, there are relationships where the ‘click’ is missing and banking is a peoples’ business,

but then you try to figure out what could be the reason. The firm could possibly have other banks

it is having close relationships with and it does not see a reason to expand its banking group.

It may be better not to push too hard and it will be put to rest. However, as soon as something

changes within that organization e.g. a change of structure or management, we will again try

to build up the relationship with ‘new’ potentials.

Does more competition result in less Relationship Banking?No, more competition means a higher need for relationship banking because you do not want

to compete only by offering products at the lowest price but on the know-how, timing and

expertise we have to offer. Our policies support that idea, as mentioned before, it is crucial

within our field to maintain long-term relations because only then we can offer customized

solutions to our clients. The bank sector is largely dependent on people, systems and trust, and

you have to invest in all of these components over time, so that a solid foundation can be build.

What kind of approach do you have towards your work? Is there a lot of rivalry among bankers and attracting clients?I have been in this position for eight years now and have established strong and short commu-

nication lines with our clients. Obviously, it is not custom to wait and watch if new clients will

appear on your doorstep. It is crucial to be pro-active and engage with clients on various

including having dialogues, exchanging thoughts/visions, at board level. At Rabobank our

approach is to invite our clients and potential clients to exchange know-how, information and

strategies. Thus, attracting new and maintaining current relationships needs to happen on a

very interactive level, a vision that is very close to the core of the Rabobank Group.


28 • Interview

Cash flows of firms have become morevolatile and unpredictable.*

Is Relationship Banking important for small firms or large corporations?I think that it is important for every firm regardless of the type or size of a corporation. Such

company requires attention and support on a regular basis. However, large multinationals not

only tend to have a complex business model but also their local subsidiaries can require a lot of

attention and support, so the number of people and therefore contacts increases exponentially.

But for both types the need for relationship banking should not be underestimated, as this is a

service industry.

Have banks become stricter with their covenants due to the crisis? Taking the attentive approach. The covenants we agree upon generally do not change because of the challenging economic

environment, but the monitoring of those covenants has become more important. Covenants

should be seen as tools that identify potential problems in an early stage and thus offer an

opportunity to discuss potential pitfalls with your client. Cash flows of firms have become more

volatile and unpredictable and covenants can be used as an early warning tool. Before the crisis

refinancing of firms would take place two à three months before the end of the tenor, but now

we start discussions around twelve months in advance. This indicates the impact of the attentive

approach, which is in the interest of the clients as well.

Are banks more careful with providing new loans? Firms have to grow and invest, how does this affect the relationship with your clients?For good business models we will provide funding and for our current clientele base there is

sufficient capital available. In the Netherlands, our client base can count on support from us

but, internationally, besides assisting our Dutch clients ‘expansion, we focus at Food and Agri-

culture industries, as that is part of our strategy.

Has the crisis damaged the image of banks?When we talk about the crisis it is, in my opinion, important to make a distinction between the

credit crisis, which started in the US housing markets, and the current economic crisis.

Grooming the two, under one name would be simplifying the situation. However, the image of

banks has been put to test and some have been hit harder than others. Rabobank has weathered

the crisis relatively well and we did not need support from the Dutch government. But as a

sector we are hit hard, which has lead to many new regulations (including Basel III and new

taxes) hence as banking sector we need to be conscious on the actions we take and our role in

society. It means we need to be transparent in the work that we do, serving our clients, rather

than being arrogant about it. Looking at some international banks, for example in the UK or

US, the main purpose is to create value for the shareholders and employees as opposed to sharing

the clients’ vision. This mentality distorts the role and image a bank should have in society, but

this is something that I believe does not generally apply to banks in the Netherlands and

definitely not to the Rabobank group. But as a banker you have to be conscious of the views and

opinions of the community you work and live in.

Interview • 29

Rules don’t rule Regels. In de accountancy heb je ermee te maken. Maar dat betekent niet dat wij ons door

regels laten regeren. Bij Mazars vinden we dat ze geen rem mogen zijn op onze inventiviteit.

Integendeel. Wij helpen bedrijven zich verder te ontwikkelen. Vooruitkijken vinden we even

zinvol als achteruitkijken. Creëren is net zo belangrijk als controleren. We verschuilen ons niet

achter regels, maar gebruiken ze. Rules don’t rule staat voor onze mentaliteit. Onze accountants

en fiscalisten durven over grenzen te kijken. In welke functie je bij ons ook aan de slag gaat, je

werkt altijd samen met andere disciplines. In teamverband ga je verder dan het geijkte. Dat

maakt je werk boeiend en inspirerend.

Onze ontwikkeling Het daadkrachtige en breed opererende Paardekooper & Hoffman fuseerde met het interna-

tionale Mazars-netwerk. Hieruit ontstond Mazars, nu uitgegroeid tot een van de meest markante

spelers in accountancy. Mazars heeft niet de ambitie de grootste accountantsorganisatie te

worden, maar wil zich onderscheiden door zijn actieve opstelling, brede dienstverlening, hoog-

waardige kennis en effectieve, inventieve oplossingen. Als netwerkorganisatie zijn we een

vertrouwde partner voor een toenemend aantal cliënten die Europa als hun thuismarkt zien en

behoefte hebben aan een andere mentaliteit in accountancy. Wereldwijd werken er 13.000

professionals bij Mazars in 69 verschillende landen. In Nederland hebben we 10 kantoren.

Durf jij verder te gaan met Mazars?Ga verder met Mazars. Het is een opdracht én een belofte. Voor onszelf, voor onze medewerkers

en voor onze cliënten. Een belofte die we waarmaken door een bredere en actievere dienstver-

lening op het gebied van accountancy, fiscale dienstverlening en management consultancy. Bij

Mazars vinden we leren erg belangrijk. Kennis en inventiviteit zijn de peilers van onze dienst-

verlening. Daarom krijg je bij ons de ruimte om je eigen weg te vinden. Vind jij dat regels nooit

het excuus mogen zijn om niet meer na te denken? Ben jij klaar om je te ontplooien in een

organisatie waarin niet alles vastligt? Neem dan contact op met Evelien Appeldoorn: 088 277 15

50 of [email protected]. Of kijk op www.mazars.nl.

Bedrijfspresentatie Mazarsfsrforum • volume 15 • issue #2

30 • Companypresentation

In gesprek met Matthias Freeke (22) senior assistant OMB Financial Audit (kantoor Rotterdam)

Waarom koos je voor Mazars?Sinds het voorjaar van 2009 ben ik werkzaam bij Mazars, na zes jaar middelbare school wilde ik

graag gaan werken en gelijktijdig leren. Het duale studietraject accountancy van de Nyenrode

Universiteit sprak mij dan ook erg aan. Toen ik mij ging oriënteren op de arbeidsmarkt en bij

verschillende accountantsorganisaties solliciteerde sprong de flyer van Mazars er voor mij uit

op een positieve manier. Mijn beeld van een accountant was toch de typisch grijze, saaie, niet-

creatieve muis in pak. De flyer van Mazars was juist creatief, wel in grijs-kleurige tinten, maar

totaal niet saai!

Rules don’t rule volgens Matthias:De slogan ‘Rules don’t rule’ moet niet te letterlijk worden genomen. Binnen de accountancy

zijn er natuurlijk regels waar wij ons aan dienen te houden, maar Mazars probeert de werk-

nemer ook vrij te laten en stimuleert hen te blijven na- en meedenken. Voor mij houdt ‘Rules

don’t rule’ in dat ik naast mijn normale controlewerkzaamheden ook actief betrokken ben bij

business development. Ik vind het erg leuk om betrokken te zijn bij het binnen halen van

nieuwe klanten en heb de afgelopen jaren al meegewerkt aan vele offertes, voorbereiding van

offertegesprekken en het bedenken van nieuwe ideeën om nieuwe klanten te benaderen. Juist

deze werkzaamheden naast mijn controlewerkzaamheden geven veel plezier aan het werken bij

Mazars.

Companypresentation • 31

Al moet daar misschien bij worden opgemerkt dat 15% op

het einde best veel is. Vooral waar tegenwoordig kinderen

vaak pas op latere leeftijd van de ouders worden geboren en

studiebeurzen minder rijk gezaaid zijn. Moderne ouders zijn

met 65 jaar nog niet uit de financiële zorgen.

Maar het valt misschien mee. Het salaris stijgt in het algemeen.

Ik ben uitgegaan van 2% reële stijging per jaar. En dan is voor

een identieke uitkomst van e610,82 een doorsneepremie van

4% voldoende. Maar op basis van het hogere middenloon

resulteert dat in slechts 5,5 pensioenjaren. Als je weer op 9

pensioenjaren wil uitkomen, moet 7% als doorsneepremie

worden betaald. Voor een zelfde eindwaarde zou bij een jaar-

lijkse reële groei van 2% bij Goudswaard een 25-jarige 4,87%

premie moeten betalen en de 65-jarige 23,4%. Dat laatste

lijkt me een zeer zware last. Mijn persoonlijke voorkeur zou

zijn om gedurende 40 jaar dan toch maar telkens 7% premie

te betalen.

Nu zal niet elke carrière zo gladjes en zo voorspelbaar verlo-

pen als ik in mijn cijfervoorbeeld heb aangenomen. Verras-

sende promoties kunnen het middenloon opstuwen. Daarte-

gen helpt een uitkering op basis van beschikbare premies.

Wat mij betreft is dat als oplossing van ongelijkheid veel aan-

trekkelijker dan het voorstel van Goudswaard.

Goudswaard lijkt de volgtijdelijkheid van ouderdom uit het

oog te verliezen. Pensioengerechtigden zijn namelijk ooit

jong geweest. De oudere heeft zelf dat nadeel als jongere al

achter de rug. Dat “nadeel”wordt gecompenseerd met het

“voordeel” op latere leeftijd. Omgekeerd: de jongere van nu

moet zich niet vergelijken met de oudere van nu maar met

deze oudere toen ook hij nog jong was. En dan zal er niet

meer zoveel ongelijkheid overblijven.

Aanvankelijk werkte een mij bekende 65-plusser in het voor-

uitzicht van een pensioen op basis van eindloon. Naar hij

zich meent te herinneren was dat pensioen welvaartvast

(maar herinneringen maken alles mooier dan het misschien

wel was). Dat werd middenloon en alleen nog maar waarde-

vast (kan toch een verschil maken). Vervolgens werd hem als

ambtenaar als gevolg van de bezuinigingsronde omstreeks

1982 het salaris (de pensioengrondslag) met 15% nominaal

gekort. Het was dezelfde bezuinigingsronde die ook de perio-

dieken wegvaagde die hij volgens zijn rang – die ook werd

afgeschaft - nog tegoed had. Ja, dat bespaarde hem wel wat

premie, maar die zou hij graag hebben betaald. Uiteindelijk

kreeg hij een pensioen dat tot nu zonder inflatievergoeding is

en met een nominale aftrek in het vooruitzicht. Een intens

triest verhaal.

In dat perspectief is het opmerkelijk dat de jongeren van van-

daag er nog erger aan toe zouden zijn dan deze 65-plusser en

zijn generatiegenoten. Althans Kees Goudswaard wil voor de

jongeren een lans breken. In Het Financieele Dagblad van 12

november 2012 wordt door Elisa Hermanides en Rob de Lange

naar hem verwezen voor de volgende uitspraak: “Jongeren

moeten relatief minder premie betalen voor pensioenopbouw

dan ouderen”.

Zijn betoog komt er op neer dat een jongere als zodanig een

premie betaalt die langer uitstaat dan de premie die een

oudere betaalt. Daarom is de premie van de jongere meer waard

en daarom moet hij minder betalen. “Nu betalen jong en oud

nog een even hoge premie, de zogeheten doorsneepremie”.

Ik ben eens gaan rekenen. Uitgaande van een constante beloning

van 100 per jaar, een doorsneepremie van 6% per jaar en een

rekenrente van 4% op jaarbasis komt de eindwaarde van de

betaalde premies uit op het bedrag van e610,82. Goed voor 9

jaar pensioen van 70% van het middenloon. Op basis van

dezelfde uitgangspunten komt de gedachte van Goudswaard

neer op het verloop als in grafiek 1. Als volgens deze grafiek

premie wordt afgedragen hebben alle afdrachten bij 65 jaar

dezelfde eindwaarde. Op 25-jarige leeftijd bedraagt de premie

dan 3,043% per jaar en aan het einde is dat opgelopen tot

14,61%. De waarde van het totaal gespaarde bedrag is ook

dan e610,82. Op het einde maakt het dus geen verschil. De

vraag is wat iemand liever doet: gemiddeld 6% betalen of

opklimmend tot bijna 15% gaan. Zelf weten, zou ik zeggen.

Drs. Joost G. Groeneveld

RA RV is directeur van

Wingman Business

Valuators B.V. te Breda en

voorzitter van de Stichting

WBO (register van

business valuators).

Hij was hoofddocent aan

de Economische Faculteit

van de Erasmus

Universiteit te Rotterdam.

Pensioenpremie betalen

K(r)anttekening | Drs. Joost Groeneveld RA RV1

32 • Pensioenpremie betalen


Ja, zegt Goudswaard, maar als iemand halverwege zzp-er wordt. Dan heeft hij wel de dure jonge

jaren betaald en mist hij de voordelige latere jaren. Met een parafrase naar Goudswaard:

“Waarom zou je solidair willen zijn met mensen die eerder willen stoppen” in dit geval met

premie betalen?

Maar er is een oplossing door aan de jaarpremies een verschillend gewicht te hangen. In mijn

voorbeeld zouden de eerste 15 premies dan goed zijn voor (ruim) 20 van de 40 jaren (zie grafiek

2). Vervelend wordt het dat de laatste jaren dan niet meer zoveel bijdragen aan een hoger pensioen.

Dat zou er misschien toe kunnen leiden dat ouderen vervroegd uittreden.

Goudswaard vervolgt met op te merken dat vergrijzing de druk op de jongeren echter vergroot.

Dat lijkt me een onjuiste vaststelling. Daar staat immers tegenover dat de oudere op de koop-

kracht en de nominale omvang van zijn pensioenuitkering inlevert, hoewel hij zijn hele leven

als jongere en als oudere zijn premie heeft betaald. Je kunt je ook afvragen of de oorzaak van

een (te) lage dekkingsgraad niet (mede) is veroorzaakt door een minder geslaagd beleggings-

beleid aan de zijde van het pensioenfonds, respectievelijk de toepassing van “lange termijn”-

rentevoeten op basis van “korte termijn”-gemiddelden.

Zou het een oplossing zou zijn om elke pensioengerechtigde zijn bij elkaar gespaarde geld mee

te geven? In plaats van het “mechanisme” van Goudswaard “om de pensioenen automatisch aan

te passen als de levensverwachting toeneemt”? Onder andere kunnen we dan zelf kiezen voor

een profilering van het risico dat we nu lopen met dat automatische “mechanisme” dat Goudswaard

voorstelt.

De vraag is wat iemand liever doet: gemiddeld 6% betalen of opklimmend tot bijna 15% gaan.

Pensioenpremie betalen • 33

Protect relationship banks from internet grasshoppers

Ivo Arnold1

The financial crisis has, in a brutal way, drawn attention to the activities of banks. Traditionally,

two types of business models are distinguished in banking: the relationship-oriented model and

the transaction-oriented model. Relationship banking is about building and maintaining long-

term relationships between banks and their clients. A relationship bank invests in collecting

client-specific information and tries to maintain the bank-client relationship over time to sell

multiple financial products. In contrast, transaction banking is about impersonal financial

transactions, which are mostly conducted through financial markets. In general, transaction

banks have more tradable securities on their balance sheet, while relationship banks lend rela-

tively more to small and medium-sized enterprises (SMEs) and consumers.

During the financial crisis it became evident that transaction banks are more vulnerable to a

change in market sentiment than relationship banks. The value of their securities fell sharply

and their funding via money and capital quickly dried up. In contrast, relationship banks had

more time to protect themselves against the effects of the crisis: their deposit funding was rel-

atively stable and impairments on bad loans could be postponed.

Over the last decade relationship banks have been confronted with a new, innovative way of

banking, the so-called the pure play internet model (PPI).2 PPI is a business model whereby

banks collect savings exclusively via internet and abstain from local market presence in the

form of physical branches. With well-functioning ICT systems, clever marketing strategies and

high interest rates, a PPI bank can attract a lot of savings in a short period of time. Superfi-

cially, PPI banks and relationship banks target the same client. However, the lack of a physical

local presence makes it difficult for PPI banks to invest in a long-term relationship between

bank and client. As a result, most PPI banks do not collect client-specific information and do

not provide loans to SMEs. PPI banks also attract savers who are mainly interested in a high

interest rate, and who may quickly go elsewhere if rates are higher there (these are the so-

called hit-and-run savers). It is therefore safe conclude that PPI banking is very different from

relationship banking.

One important downside of PPI banks is that they uproot savings from local communities and

do not necessarily re-invest these funds in the same community, as their knowledge is too lim-

ited to lend to local SMEs. In that sense, one could compare PPI banks with grasshoppers. As a

consequence, less funding is available for local SMEs. PPI banks such as ING Direct and Icesave

invested their internet savings mainly in bonds. This could make funding costs higher for the

traditional relationship banks and make SME lending more expensive. PPI banks can get away

with this because of the deposit guarantee system: clients shop for the highest interest rate

without having to worry about a bank’s risk profile.

Another downside of PPI banks is that they may burden the national deposit guarantee system.

This is especially a concern when PPI banks start to operate internationally via branches, as

ING Direct and RaboDirect currently do. By choosing the branch format, the foreign deposits

are quaranteed under the Dutch deposit guarantee system. When push comes to shove the

Dutch taxpayer will be liable for these foreign savings. However, when big banks in tiny coun-

tries operate internationally, supervisors should take extra care to protect taxpayers’ interest.

The Icesave case in Iceland made it very clear that a large imbalance between the size of the


34 • Protect relationship banks from internet grasshoppers

financial sector and the size of the economy is risky. Unfortunately, the Dutch supervisor hasn’t

yet learned this lesson.

A different design of the deposit guarantee system could neutralize the negative effects of PPI

banks and maintain the public protection of the useful activities of relationship banks. Cur-

rently, whether a bank falls under the Dutch deposit guarantee system is mainly a legal matter.

Any bank with a banking license will be protected by the system, whatever the business model.

As a result, Leaseplan could start a PPI bank and collect insured deposits, even though Lease-

plan is not a relationship bank and supporting a car lease company is clearly not a public task.

In general, one can doubt whether PPI banks and transaction banks should fall under a public

safety net. An economic analysis of this question should focus on whether public support for

banks is in the public interest. The public interest is that the domestic payments system is pro-

tected and that bank lending to SMEs – firms that do not have direct access to financial markets

- is maintained. PPI banks that invest their funds in securities do not fulfill an indispensable

social task. Mutual funds do this as well. There is also no good reason why the Dutch taxpayer

should protect the deposits of foreign savers’ of the PPI branches of the big Dutch banks. A dif-

ferent deposit guarantee system, in which the government decides which banks deserve to fall

under the public safety net, is thus called for. Such a system needs a supervisor who dares to

exercise judgment, instead of following a rule book. It could also provide government a power-

ful instrument to discourage activities of banks which do not serve the public interest.

The pivotal role that relationship banks play in financial intermediation would certainly qualify

them to fall under the protection of a deposit guarantee system. In contrast, PPI banks’ busi-

ness model undermines traditional relationship banking, makes SME credit more expensive,

and exposes the taxpayer to extra risks. In my opinion, these grasshoppers should be excluded

from deposit protection.

1 Professor of Economics at Erasmus School of Economics and Nyenrode Business University.

2 See Arnold, I.J.M. and S. van Ewijk, 2011, Can pure play internet banking survive the credit crisis? Journal of Banking and Finance, 35(4), 783–793.

One can doubt whether PPI banks and transaction banks should fall under a public safety net.

Protect relationship banks from internet grasshoppers • 35

Wil jij een carrière inCorporate Finance?Duisenberg school of finance onderscheidt

zich van andere universiteiten door de inzet

van vooraanstaande academici uit binnen- en

buitenland, kleinschaligheid en veel aandacht

voor sustainable finance.

Alleen de beste studenten worden toegelaten

tot één van de vier Master programma’s. Door de

nauwe samenwerking met de sector wordt in de

programma’s een brug geslagen tussen theorie

en praktijk. Kies voor het Corporate Finance and

Banking - of Financial Markets and Regulation

programma en wordt een gewilde kandidaat

voor functies in Mergers and Acquisition, Private

Equity, Structured Finance, Asset Management,

Equity Research en Consulting.

DSF Programma’s•MSc Finance, Corporate Finance and

Banking track

•MSc Finance, Financial Markets and

Regulation track

•MSc Finance, Risk Management track

•LLM Finance and Law

Aanmelden is gemakkelijk

en doe je via de website!

www.dsf.nlfor leaders in finance

DSF227_A4advertentie_CFB_FMR_02.indd 1 30-08-12 11:45

Relationship banking: Do something useful for customers!

Philip Hans Franses

A modern instrument that banks are enhancing, or are

planning to do so, is called “Relationship banking”. The term

borrows from customer relationship management (CRM),

which is fashionable already for many years in various areas

of the service industry, but these days also of energy firms,

insurance companies and government. A key idea is that

acquiring new customers is usually more expensive and tedious,

than to retain current customers by somehow making them

happy.

It is often believed that current customers can be made more

happy, and of course the firms too, by cross-selling some of

the other products of the firms. Telephone companies offer

SMS services for low fees, or even provide you with a new

phone if you extend your bundle with a few more minutes.

Or, energy firms offer a free check-up of your boiler if you

switch from your current provider to theirs.

Banks can also strengthen the relationship with their customers

by offering a new array of financial products and services.

Additional to a basic savings account, banks can offer credit

cards, insurance products, loans and any type of business service.

It is quite likely that customers could be made to feel happier

with these new products and hence stay loyal to your firm,

even when you reduce the interest rates on their savings

accounts.

Marketing research in the last few years has shown that

future customers’ behavior can be quite predictable. One

reason may be that with all these newly cross-purchased

products, customers have complicated their own decision

process. Indeed, leaving one provider for another implies

that all products have to be evaluated again, and this implies

quite a comprehensive consumer task. A second reason,

which associates with the first, is that many customers do

not always fully comprehend what all these newly acquired

products actually entail. Recent economic research shows

that often customers have insurance some of which is not

relevant. Also, the recent economic crisis has indicated that

many people cannot properly handle a credit card, and as

such end up in a financial mishap. Other research has shown

that many individuals would have problems with solving

rather straightforward computations, while computations

with interest rates are too difficult for even bachelor students

in Economics.

In my opinion, it would now (and the time of writing is

December 2012) be a very good moment for banks to look for

forms of relationship banking that would really help customers.

And, not only help them, but also do so in a for customers

understandable way. Banks could arrange that the default

option of loans for durable consumer goods (like cars and

electronics) is that the debt has to be paid back before the

average lifetime of these products. Indeed, many electronics

and computers will have to be replaced after, say, 3 years, and

banks should prevent that customers still have to pay off

debts for already replaced products. Furthermore, banks can

only issue credit cards once a deposit has been dropped. And,

banks can make sure that customers carry only a single

credit card. Banks can also help with mortgages and take as

the default version of the product the version with the least

risk, in case customers need to sell their house sometime

near in the future. It is sad but well-known that many mar-

riages do not make it to the end, and that an earlier end of a

marriage frequently entails that people have to sell their

house. This knowledge can be incorporated in the products

that banks try to cross-sell.

In brief, it would serve banks to think of relationship banking

such that it really is useful to the customer. I would recom-

mend doing so, even when short-term profits are low or

absent. After all, loyal customers are much more important

in the long run. Of course, this means a shift from short-

term think to longer-term visions. This also means that

future managers benefit from today’s managers’ actions. A

new way of thinking about what banking actually is, is at

stake here, and perhaps now is the right time to start with

that.


Relationship banking: Do something useful for customers! • 37

Wil jij een carrière inCorporate Finance?Duisenberg school of finance onderscheidt

zich van andere universiteiten door de inzet

van vooraanstaande academici uit binnen- en

buitenland, kleinschaligheid en veel aandacht

voor sustainable finance.

Alleen de beste studenten worden toegelaten

tot één van de vier Master programma’s. Door de

nauwe samenwerking met de sector wordt in de

programma’s een brug geslagen tussen theorie

en praktijk. Kies voor het Corporate Finance and

Banking - of Financial Markets and Regulation

programma en wordt een gewilde kandidaat

voor functies in Mergers and Acquisition, Private

Equity, Structured Finance, Asset Management,

Equity Research en Consulting.

DSF Programma’s•MSc Finance, Corporate Finance and

Banking track

•MSc Finance, Financial Markets and

Regulation track

•MSc Finance, Risk Management track

•LLM Finance and Law

Aanmelden is gemakkelijk

en doe je via de website!

www.dsf.nlfor leaders in finance

DSF227_A4advertentie_CFB_FMR_02.indd 1 30-08-12 11:45

Dear reader,

Time flies when you are having fun. Nothing will apply better to this than the past six months

of being a board member of the FSR. The first part of the academic year proved to be a great

success with the International Banking Cycle, Big 4 Cycle, Accountant Firms Day, Finance Day,

Traders Trophy and the Financial Business Cycle. Now that a new year has begun, I would like to

use this opportunity to wish you all a very successful and fruitful year on behalf of the FSR board!

The first cycle of the year was the International Banking Cycle. Together with the ten investment

banks we invited a selection of over 200 students to work on cases and have the first-hand

opportunity to get acquainted with the work of an investment banker. This year we expanded

the opportunity of choosing between a Mergers & Acquisitions workshop and a Sales & Trading

workshop. Next to these workshops, the presentations and drinks at ‘The Faculty Club’ provided

many interested students with more information about the opportunities within investment banking.

Again, there were record breaking enrolments for the Big 4 Cycle this year and we are very satisfied

with the different perspectives these four inhouse days delivered. Together with the Accountant

Firms Day the accountancy student is very well served at the start of this academic year. Already

famous in the FSR curriculum is the Traders Trophy, where over 90 students can experience

what it takes to be a stock trader through a simulation game. Although a little hectic at some-

times, trading stocks in the market is nerve gripping and very addictive.

Next to these events we had the honour to host many guest lectures this year and we look forward

to those to come. These guest lectures provide an excellent base to link the theoretical lectures

to the practical insight of a company.

At the 10th of November the yearly active members day took place. First, we suited up in cam-

ouflage and grabbed our Tippmann guns to hunt each other down on a great paintball field in

the south. While proudly showing our fresh bruises of the battle we departed to the second

activity: wall climbing in ‘de Bergse Hoek’! After seeing the real strength of our active members

and former board members it was time to wine and dine at Café ‘Beurs’. To finish the day and

start the night we went to ‘Vrienden van Live’ to enjoy the live music.

Finally the last inhouse days of the Financial Business Cycle took place in January. You will find the

report in the next episode of the FSR Forum. Also, the preparations for the International Research

Project are almost done as in May the participants will leave to Beijing. Next to this international

journey the European Finance Tour will depart to Zurich with an exciting and packed programme.

For the finance-oriented students the Banking Dinner and Multinational Dinner are two events

not to be missed in January. In addition, the Erasmus students will have to strive to be the best

at the Multinational Battle and make Rotterdam champion for the third time.

As you can read, we can look back on a successful first half year, but there are many more activities

yet to come. Therefore, I would like to end with saying I look forward to welcome you all

at one of our cycles, workshops, master classes or drinks.

FSR News

40

41

44

47

Column Mariska van Hoorik

Column Roy Perlot

International Banking Cycle

Active Members day

Word of the chairman

Sep Vermeulen


38 • FSR news

BRITAIN’S banks are still in retreat. Figures released on July

30th showed their lending to corporations fell in June to

£489 billion ($762 billion), more than 25% below a peak at

the end of 2008. Bank lending to unincorporated, usually

smaller, firms has fallen similarly (see chart). Many busi-

nesses are anxious about the economic outlook and have no

immediate need for credit to expand their operations. But

the high and rising cost of bank loans suggests credit supply

is still a problem. The rate paid by firms on bank loans has

risen by 0.16 percentage points, to 3.12%, since June last

year, well above the Bank of England’s benchmark interest

rate, of 0.5%. The rate on overdrafts has jumped to 3.79%.

Bank credit is likely to remain scarce when business confi-

dence eventually recovers. The international rules on how

much capital banks must set aside against different sorts of

loans, known as Basel 3, make small-business lending a costly

proposition. Old loans weigh on scarce capital, limiting the

scope for new ones. The “funding gap” left by retreating

banks may prove as large as £191 billion, according to a

report for the government by Tim Breedon of Legal & General,

a big insurer. How might it be filled?

Some other finance firms sense an opportunity. Shawbrook

Bank and Aldermore were established recently to provide

small- and medium-sized businesses with banking services.

Yet their lending is measured in the hundreds of millions,

rather than billions, of pounds. GE Capital, the finance arm

of the engineering giant, has more muscle. Its lending to

British firms rose by a quarter between 2009-10 and 2011-12.

It focuses on firms with revenues of between e10m and e500m,

leaving the corporate giants to the big banks, which can offer

investment-banking services.

Its parent’s manufacturing heritage gives GE Capital an edge

in asset-backed lending—the kind that is secured against

invoices, stock, or equipment, and which requires less regu-

latory capital. “We know how to value critical equipment,

such as copiers or cars, for resale”, says Rich Laxer, head of

GE Capital’s business in Europe. Limiting the losses on risky

small-business lending requires a detailed understanding of

local businesses. Mr Laxer says his staff are rigorously trained

in credit analysis and spend time getting to know their cus-

tomers. As banks retrench, GE Capital has a chance to build

business relationships “that will survive for 10 or 20 years”.

Small-business lendingBank transferGrowing firms need to look beyond the big banks for creditMost recent newsupdate about the subject.

Businesses might hope to tap into institutional funds. In part because of regulation, insurance

and pension firms prefer big bond issues backed by the government or large firms, which can

be easily traded in and out of. Mr Breedon’s report suggests the creation of a state-backed agency

to pool small-business loans might address this. But even if a liquid market in such securities

could be created, it would still rely on banks with experienced loan officers to assess the credit risk

of small firms.

A more promising route is for companies to raise money directly from savers. Small but fast-

growing web-based firms such as MarketInvoice and Funding Circle put businesses in need of

cash in touch with well-heeled investors or cash-rich companies. More than £2 billion in debt

has been raised through the order book for retail bonds (ORB), an electronic trading platform

launched by the London Stock Exchange Group in February 2010. These bonds come in blocks

of £1,000 or less to make them accessible to small savers. Bonds available on ORB include

issues by familiar names such as Rolls-Royce as well as by smaller entities such as PHP, a health

care facilities firm, and Places for People, a housing trust. Issues are often oversubscribed.

Xavier Rolet, chief executive of the London Stock Exchange Group, cites Italy’s retail-bond

market, where up to e5 billion of corporate bonds are traded daily, as a guide to ORB’s potential.

Such markets should grow as more business folk gradually find out about them. The hope is

that banks do not further retreat from corporate lending before alternative sources can fully

emerge. The Bank of England’s “funding for lending” scheme, launched on August 1st, should

help. It gives commercial banks access to cheap money for up to four years, at interest rates as

low as 0.75%. The cost of funds are cheapest for banks that maintain or increase their lending

to businesses and consumers and dearest for those that cut it. The scheme will help slow the

rate at which bank lending is shrinking. But it will not stop it altogether.

Source: http://www.economist.com/node/21559928


FSR news • 39

FSR Former board member

Mariska van Hoorik

I remember my FSR board year as a very fun year, in which I

learned a lot. For me, one of the most positive aspects of

being a board member of the FSR was the combination of

study related activities, recruitment activities and social

activities. One day we could be having diner with the most

prestigious companies, the next we’re having an alumni

drink and the following morning we could be lining up in the

C-hall to promote our next event!

My personal highlight of the year was of course the Interna-

tional Research Project to Brazil. I had been preparing this

for almost a year, so I was very excited when we finally arrived

in Sao Paulo and later Rio de Janeiro. Some of the company

visits were quite impressive and I had great committee and

group members to join me in this experience.

It was also a pleasure to be part of the 10th FSR board

because we were a great team. We got closer and closer

during the year through all the experiences that we shared.

And even now, we still meet each other on a regular basis for

drinks or a weekend trip. We also were the lucky ones to

organize the Lustrum 5 years ago, with a programme that

will be very hard to beat this Lustrum!

The FSR for me, also was a start of a more ‘serious’ student

life. I had been studying for 4 years, but only after I joined the

FSR I felt involved with the university and started thinking

about my future career. It gave me a broader perspective of

the opportunities after graduation and what companies had

to offer. Not that this made my choice after graduation any

easier… This is why I decided to apply for a traineeship. This

way I could figure out what I wanted and gain work experience

at the same time. I started my traineeship within Fortis Bank

Nederland and got the opportunity to do 5 assignments,

most of them within Finance. One of my assignments was on

Curacao and one in New York, not a bad start of my career!

After my traineeship I started working at the central Finance

department of the new ABN AMRO. My team was responsible

for all forward looking financial information of ABN AMRO

group, such as the budgets and forecasts, reporting almost

directly to the board of directors of ABN AMRO. A good place

to start in a large company such as ABN AMRO, since I got to

see a lot that was going on within the bank.

PassPort

Name

Mariska van Hoorik

age

27

residence

Amsterdam

Employed at

ABN AMRO

Current position

Customer Excellence

Expert

Which Fsr Board

10th

Board function

Commissioner IRP

study

Economics – Account-

ing, Auditing & Control

Year of graduation

2009

Which car do you

drive

My bicycle brings me

everywhere

What do you drink

on a Friday night

Beer, wodka

Life Motto

Get the most out of life

As of January, I will be starting in my new job as Customer

Excellence expert. Customer Excellence is the new way of

working within ABN AMRO based on LEAN principles and I

will be introducing it in departments of ABN AMRO. It will be

something completely different than what I studied for, but I

am very excited to take on this new challenge. And I’m sure

that all my experiences, including those within the FSR, will

help me with this.


40 • FSR news

FSR Member

Roy Perlot

How did you come in contact with the FSR? Since I studied my Bachelor in Groningen and decided to

move to Rotterdam for my masters, I wanted to participate in

some events or do something when I started in Rotterdam.

So when I first heard of the International Banking Cycle I

was impressed and thought who organizes that? Well the

FSR did and I thought that I should send them an email/call

to see what is going on at the FSR.

Basically they where still looking for some committee members

and one of the ladies on the board told me which spots where

open and that I should apply within 2 days as the deadline

was already due officially.

I thought, why not? It can be fun and a good way to network

a bit. I had no real clue what FSR was and reckoned that

there where so many study associations to choose from. How-

ever, I am still happy that I joined the FSR of course.

In which FSR event did you participated?I participated first in the IBC in 2010 and then helped organ-

izing the Financial Business Cycle.

How have you arranged your job?I started applying to many internship vacancies in the Nether-

lands first, as I figured out that my CV was not that great

compared to my fellow students around me. I just wanted to

get any internship related to banking/advisory and found an

opportunity at a smaller Private Equity player GIMV. From

there I could make the step to get an offer for Lazard internship

in the Netherlands. While doing this internship I participated

in the IBC 2011 edition and managed to get a full-time offer

for Morgan Stanley through the IBC event. As I did my

internships at Lazard, they decided to offer me a full-time

position. In the meantime, I finished my second internship

and my studies.

Please describe your experiences at the job in general (corporate culture, assignments, colleagues, etc.)So far it is has been a great experience. First of all the training

is absolutely brilliant in terms of fun, networking and learning

your way around in a new city. You really “get to know”

(when drinking until late in the bars) all first year analysts

that start around Morgan Stanley, which makes your life

much easier when you start on the job and you need people

from across the world (so advice: participate in any event and

join for any party). Then afterwards you hit your desk and

you are welcomed by the team, which was a smooth transi-

tion to be honest. My team is quite big so I tend to work with

many different people/nationalities all the time, which I

really see as a benefit. Average project teams consist of four

team members, one for each level in seniority in the Bank. As

the analyst, you have to do all the work basically, but it also

makes you the one that can connect all the dots, as the seniors

do not really know every minor detail. From day one on you

are involved in everything and they share all inside informa-

tion with you, which is great as they really encourage you to

listen and start thinking like the more experienced people as

quickly as possible.

What do you consider to be your best performance during your job?Multi-tasking and managing expectations properly, that is

key to “safe” yourself from underperforming. I personally do

not feel much pressure even if there is a lot sometimes,

which is good as you can be realistic and perform better. As

the work is very dynamic and the workload can be volatile, I

remember one week where a project kicked-off and we had

two pitch books to be delivered in the same 3 days. As you are

working with different teams they are mostly unaware of

your other projects and hence they do not know that you are

super busy at that time, which makes it a bit tough and

extremely busy but very fun to manage it and in the end I got

everything delivered in time (just in-time to be honest).

Which moment of your job will you never forget?The first flight that I missed after “enjoying“ attending the

IBC this year……. I missed a meeting, had my seniors chasing

me and arrived in the office feeling terrible and then I got

staffed on my first live deal. That was a typical moment that

you see what a rollercoaster a job (in a few hours from worst

moment you can imagine to a very good moment, as good

deals are rare in this market) in Investment Banking can be,

but also the moment when I realized that this is the right job

for me, at this moment…

PassPort

Name

Roy Perlot

age

24

residence

London, UK

study

Master in Finance &

Investments, Bachelor

in Business Manage-

ment

Fsr event

International Banking

Cycle/ Financial

Business Cycle

Job at

Morgan Stanley

Department of

job

Investment Banking

Division : Financial

Institutions Team


FSR news • 41

Activity Report Accountant Firms Day 26 November 2012

The FSR organized the accountant firms day (AKD) in cooperation with

Baker Berk Tilly, BDO, Grant Thornton and Mazars on the 26th of

November. On this day, students had the opportunity to get acquainted

with some of the middle-sized accounting firms, during an intensive

and practical case workshop. The event was held at hotel STROOM in Rotterdam, where a

group of thirty students was selected to participate. Each company had two employees present,

a recruiter and an auditor, who you could ask all your questions. The day started off with a

speech by dr.sc.ind. A.H. van der Boom about the accountancy world and the middle-sized

accountancy firms. The speech was followed by a short presentation by each of the four par-

ticipating firms. During the presentations the students got to know what it is like to be an account-

ant at one of these four accounting firms and the differences between them.

After these introductions, the students had the chance to get to know more about the firms and

their employees during the informal lunch. After the lunch, the students were divided into four

groups, each working on the case in their own way. During the case, the groups had to conduct

interviews with the management and other departments of the company they were going to

audit. The management was acted out by one of the employees of the accountancy firms, giving

them a chance to observe and interact with the students. This led to some interesting results.

Each group presented their conclusions at the end of the day, after which the companies got a

chance to comment. After a short discussion, one group was pronounced as the winner and

received the prize. After this intensive and informative day, it was time for some drinks and

snacks! This gave the students the chance to ask more questions that has not been answered

during the day and get even more information about the participating firms. After this infor-

mal drink, the day had come to an end and the accountancy committee can look back on a very

successful event.


42 • FSR news

Finance Day 2012

On the 27th of November the Finance day took place at the Erasmus Univer-

sity for the third time. The Finance Day is a cooperation between the FSR and

the EFR. The day started with a short introduction, after that Mr. van

Rossum took the stage, as the former CEO of Fortis and McKinsey&Company.

Mr. van Rossum gave some really interesting insights into the world of

banking and into the situation we find ourselves in nowadays. After that

both Prof. dr. Han Smit, program coordinator of Financial Economics at the Erasmus

School of Economics and dr. Marieke van der Poel, program coordinator of the RSM

Master program Finance & Investmenst, told the students about the possibilities for the

Finance Master program on both the ESE and the RSM.

After the insights about the possibilities at the Erasmus University, Manon ten Holter of

KPMG Corporate Finance gave an introduction on the career possibilities at KPMG

Corporate Finance. Then Naomi Beurze and Diederik Artz of SNS Reaal gave an intro-

duction on the career possibilities at SNS Reaal. After all these presentations it was time

for a lunch in the Sienna where some sandwiches were waiting.

After the lunch the workshops began. This was a new part of the Finance Day this year. The

students could join a workshop of both KPMG and SNS Reaal. In the KPMG workshop,

students were given a valuation problem of a company that had to be acquired. After

two hours of struggling, the groups gave a presentation about their findings and their

valuation of the company. In the SNS Reaal case students were faced with the problem

how SNS Reaal should approach their customers and how to manage and keep their

existing customers with them. After two hours the students had to present their findings on

how they thought SNS Reaal should do this.

Last but certainly not least, Laurens Swinkels, Vice President at Robeco and Assistant Professor

at Erasmus School of Economics, told the students everything about Robeco and his function

at Robeco in a plenary session. He also presented the questions that Robeco is facing every day

concerning Risk Management, Portfolio Analysis. All in all the Finance Day 2012 was a great

success and we want to thank the students and the participating speakers and companies for

their contribution to the day.


FSR news • 43

The International Banking Cycle 2012

This year’s edition of the International Banking Cycle kicked off with an exclusive insight into

the banking system and the problems and challenges investment banks are facing. Students at

the Erasmus University got the chance to attend an interactive congress on the topic of banking

on 12th of September, with some of the most renown speakers in their field. By this time,

students of a variety of universities were applying for the International Banking Cycle to take

part in workshops offered by ten of the worlds largest investment banks: Nomura, Lazard,

Morgan Stanley, J.P. Morgan, Credit Suisse, Bank of America Merrill Lynch, Deutsche Bank,

Barclays, UBS and ING. By uploading their CV, cover letter and company-specific motivation

letter, students enrolled in a selection procedure of which a group of 20-25 students per work-

shop would get the chance to take part.

Each of the ten participating investment banks had a full day at the Erasmus University or

University of Amsterdam (UvA), which consisted of a workshop, a firm-wide presentation and a

drinks reception afterwards. To give everyone interested in banking an idea of the corporate

culture, the different divisions in banking and the job opportunities at these firms, the firm-

wide presentations and drinks receptions were open to all and did not require subscription. For

those that were selected to take part in a workshop, working on a case offered them the perfect

opportunity to prove their skills and ambition to work at the investment bank of their choice.

Each bank offered a case with a focus on Mergers & Acquisitions, this often meant that they


44 • FSR news

were put to the task of assessing the value of a company and negotiating

the price of a takeover bid. Also, some banks offered a case with a focus on Sales & Trad-

ing, which entailed more portfolio restructuring and forecasting market movements. The

participants were challenged to prove they could work under time pressure, possessed

excellent social skills and were analytically strong. After each workshop, a group of out-

performing students was selected to take part in interviews for an internship or full-time

position the day after.

The International Banking Cycle 2012 has been concluded on 2nd of November and we

are proud to announce that it has yet again been a successful event, both for the com-

panies involved and for the participating students.

FSR news • 45

Traders Trophy 2012

Thursday, the 22nd of November the qualification rounds for the Traders

Trophy worldwide were held in Rotterdam at the Erasmus University for the

fifth time already. We were honored to organize this event, just as in the previous

years, in association with our partners Optiver and Oxyor. Expectations were set really high as

an FSR member became the national winner and Netherlands best student trader last year.

The qualification day proved to be a great success. Rotterdam had the highest enrolments

amongst the competing Traders Trophy universities. Next to Rotterdam, the qualification

rounds took place at Amsterdam, Delft, Groningen, Nyenrode, Tilburg and Maastricht. The

first qualification round started with a short introduction from one of Optivers traders and a

brief explanation on the simulation game from Oxyor. After an hour of intensive trading,

students were invited to hang out at the new Optiver lounge to play Mario games or networking

with Optiver recruiters and even challenged for a second challenge: doing 80 mathematical

questions in just 8 minutes. Another two qualification sessions were held during the day and

at the end of the day the awards ceremony was well attended.

Amongst the 90 participants during the day, four students were selected to compete in the

national final. The selection was based on scores on profitability, market awareness, market

making and risk management. The winners of the Rotterdam qualification round were Peter

Verheijen, Filip Georgiev, Jan Smeets, Korrein Volders en Matthijs Bremmer. Of this selection

Peter Verheijen was the proud all day winner and received an Apple Ipod from Optiver/Oxyor.

The national final took place at the Amsterdam Stock Exchange on the 13th of December. On

this day, participants from all over the Netherlands traded three different stocks in a very com-

petitive environment.


46 • FSR news

Active Members Day

After a secret preparation by the board the first informal activity for

our active members was organized. Saturday the 10th of November, all

the active members were ready to have fun and get to know each other more and

more. Everyone was expected at Kralingse Zoom to have our first unexpected activity. We

arrived in Eethen for a thrilling paintball death match. After the lunch, selections for a blue

and red team were made and the battle was ready to begin. First of all a death match with a

marvelous victory for the red team, but the blue team took revenge and defeated the red team

during the two other tactical operations.

After this stunning hour we had some drinks and went back to Rotterdam for the next activity.

We arrived at the former highest climb wall in Holland, with a height of 36 meters. After a

short safety instruction we could start and challenge each other who could reach the top.

After this exhausting activity, it was time to go back to Rotterdam. Everybody was quite worn-out,

but this was not yet the end of the day.

It was time to have dinner at Café Beurs, discuss all the activities of the day and get to know

each other better. After dinner we went to ‘Vrienden Live’ to enjoy the

live music and everybody could party until dawn.


FSR news • 47

FSR Activity Agenda 2012-2013

January Multinational DinnerGet in touch with the multinationals

Finance DinnerGet acquainted with the world of banking

January-April CleanTech ChallengeGrow your green ideas!

February/March Multinational BattleFour multinationals, five battling cities, are you part of it?

Corporate Finance CompetitionFive star event: hotel, companies and participants!

April Female Business TourIt might be a men’s world but it would be nothing without women

May International Research ProjectUsing your intellect for a charity!

Bachelor Accountancy DayWill you choose for a career in accounting?

European Finance TourExploring European financial world


48 • FSR news

© 2012 PricewaterhouseCoopers B.V. (KvK 3412089) Alle rechten voorbehouden.

www.werkenbijpwc.nl

Soms ben je tevredenSoms drijf je jezelf tot het uiterste

Kom verder op werkenbijpwc.nl

Je hebt tijdens je studie alle mogelijke kennis opgedaan. En nu wil je aan de slag. Op een plek waar je al je ambities kwijt kunt. Waar de lat hoog ligt en waar je samenwerkt met professionals. Je start je carrière vliegend en gaat recht op je doel af. Dat is: het beste in jezelf naar boven halen.

Neem voor meer informatie contact op met een recruiter:

Volg werkenbijpwc op Facebook en Twitter

088 792 87 [email protected] www.werkenbijpwc.nl/contact

PwC RC Standaard WO tevreden.indd 1 10/8/12 12:02 PM

Vallen. Opstaan.Vallen. Opstaan.Vallen. Opstaan.

Het ideale carrièrepad.

Vergeet het. Een kaarsrecht, steil omhooglopend carrièrepad bestaat niet. Je krijgt te maken met ups én downs. En het mooie is: je wordt er alleen maar sterker van. Zeker als je werkt bij een organisatie die je helpt en stimuleert; ook in moeilijke tijden. Want die blijken achteraf vaak het belangrijkst te zijn. Zo’n organisatie is Ernst & Young. Kijk voor jouw mogelijkheden op ey.nl/carriere

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