Relationship Banking

15th Volume January 2013 issue #2

Relationship Banking Interview J. Scheelbeek

Column I. Arnold

Column P. Franses

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p34

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Head of Senior Relationship Banking Wholesale Clients Netherlands

Protect relationship banks from internet grasshoppers

Do something useful for customers

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Om ondernemers te helpen groeien zoeken we medewerkers die zelf ook ondernemend zijn en zich continu willen ontwikkelen. Denk jij dat de rol van adviseur bij jou past? Dan hebben we voor jou ook een goed advies: werkenbijbakertillyberk.nl.

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fsrforum • volume 15 • issue #2

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.

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

fsrforum • volume 15 • issue #2

Relationship Banking

Table of contents

Relationship Banking: What Do We Know?

A.W.A. Boot

The 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. 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. 14

Why do firms switch banks?

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

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Colofon FSR FORUM appears five times a year and is an edition of the Financial Study Association Rotterdam KvK Rotterdam no: V 40346422 VAT no: NL 805159125 B01 ISSN no: 1389-0913 15th volume, number 2, circulation 1900 copies

4 • Table of contents

Editor in chief Maaike Lanphen Editorial department Petra van den Akker Roija Rasuli Editorial advisory Dr. M.B.J. Schauten Dr. W.F.C. Verschoor Drs. R. Van der Wal RA

With the cooperation of A.W.A. Boot Drs. J.G. Groeneveld RA RV A.F. Presbitero G. Radhakrishnan J. Scheelbeek G.F. Udell V.Yerramilli A. Zazzarro Prof. Dr. I. Arnold T. Moolenaar

R. van Ovost M. Petutschnig Editorial address Editiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06 Postbus 1738, 3000 DR Rotterdam Tel. 010 408 1830 E-mail: forum@fsr.nu

Interview J. Scheelbeek

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Head of Senior Relationship Banking Wholesale

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News Update

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Table of contents • 5

fsrforum • volume 15 • issue #2

Relationship Banking: What Do We Know?

A.W.A. Boot

6 • Relationship Banking: What Do We Know?

1. INTRODUCTION The 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 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.

use of covenants, and the inclusion of collateral requirements. 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 relationship 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 complementarity between bank debt and capital market funding. Resolutions 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 competition (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).

This review is organized around three distinct sets of questions. 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.

2. RELATIONSHIP BANKING IN THE CONTEXT OF THE MODERN THEORY OF FINANCIAL INTERMEDIATION

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

Commercial 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 qualitative 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 characteristics from those encountered in its loan portfolio. The banks’ assets are illiquid largely because of their information

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

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: proprietary information and multiple interactions. The definition emphasizes that relationship banking involves borrower-specific—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)):

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 information 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 relationship 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.

iii. The information remains confidential (proprietary).

These arguments also put modern developments such as securitization in the right context. Securitization is an innovation in funding technology that some have characterized as a proliferation of transaction-oriented market financing at the expense of relationship-oriented bank lending. The economics 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.

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.

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

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;

8 • Relationship Banking: What Do We Know?

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 services. The competitive advantage of banks arising from their proprietary information about their customers will be preserved, 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 transaction-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-contractable 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 intertemporal 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 indispensable in overcoming problems of asymmetric information A bank might also have better incentives to invest in information 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 accompanying a long relationship with the borrower.

The benefits related to the contractual features that relationship lending accommodates are linked to the flexibility that relationship banking can offer. The bank–borrower relationship 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 commitment 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 funding sources as well as explicit long-term commitments by banks. Therefore, both the bank and the borrower may realize 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 covenants 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

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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 seniority, 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 contracting (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 collateral 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 information 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 borrowers would pose such serious adverse selection and moral hazard problems that no bank would lend to them. Relationship 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

10 • Relationship Banking: What Do We Know?

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 correlation 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 softbudget constraint problem and the hold-up problem. Consider the soft-budget constraint problem first. The key question 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 borrower, 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 intervene? This is not obvious because the borrower can be convinced 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, subgame perfection is violated. However, when the bank has seniority, the senior claim can insulate the bank from these undesirable consequences, because the value of this claim is less sensitive 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 generally 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, delegate 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 interest rates (see Sharpe (1990) and Rajan (1992)). The threat of being “locked in,” or informationally 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 relationships 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 competition. More specifically, such a line of credit generally stipulates that the lender may terminate 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 Issues We have argued that relationships may facilitate a continuous flow of information between debtor and creditor that could guarantee uninterrupted access to funding. Some, however,

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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. Interestingly, 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 competition could impose constraints on the ability of borrowers and lenders to share surpluses intertemporally. 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 alternative view is that competition may also elevate the importance of relationships as a distinct competitive edge. Pure price competition pressures bank profit margins. Boot and Thakor (2000) show that a relationship orientation can alleviate these competitive pressures because a relationship 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 customize services, thus focusing more on relationship banking.

5.2. Empirical Evidence The costs and benefits of relationship banking have been subjected to extensive empirical academic 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 relationship, 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 requirements 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 holdup 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

12 • Relationship Banking: What Do We Know?

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) offer 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 presence of multiple relationships reduces the value of information 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 investment, 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 banking.

sources of the added value of relationship banking. In the increasingly competitive environment of banking, the differentiation of distinct costs and benefits (and the empirical verification 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 relationship 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. Substantial 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.”

6. CONCLUSION Relationship banking has become an important area of scientific inquiry. This review has focused primarily on the theoretical 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 intermediation activity. Much more research is needed, however.

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

Relationship Banking: What Do We Know? • 13

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Competition and Relationship Lending: Friend or Foes?

By A.F. Presbitero and A. Zazzarro

14 • Competition and Relationship Lending: Friend or Foes?

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

1. Introduction To 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 reforms Corporate 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 allocated to MS by an apportionment formula. Companies that are eligible and opt in, would then be taxed on their consolidated taxable profits earned across the different MS. Each state will subsequently tax the allocated profit at its own corporate tax rate. Under the CCCTB, the compliance and administrative costs of MNC are reduced, it leads to an alleviation 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 Agreement To reduce tax competition there is an ongoing plea for establishing 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 Cooperation 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

»

Competition and Relationship Lending: Friend or Foes?• 15

fsrforum • volume 15 • issue #2

results, some will benefit while others will not. The simulations ignore the reduction of compliance 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 harmonization, 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 simultaneously, 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 simulations, 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?

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

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. Conclusion In 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 Corporate 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 harmonization 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 gradually 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 mentioned 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 European 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.

Competition and Relationship Lending: Friend or Foes? • 17

fsrforum • volume 15 • issue #2

Why do firms switch banks?

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

18 • Why do firms switch banks?

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

1. Introduction A 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 produce “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 propensity to switch to a new bank to distinguish between these theories.

We obtain our loan data from the Reuters Loan Pricing Corporation’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 relationships 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 relationships. While lending relationships can benefit opaque borrowers 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. However, 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 continuing current relationships. This, we believe, is the main contribution of our paper to the literature on lending relationships.

1.1 Hypotheses Our 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 influenced by firm characteristics, bank characteristics, and bank market characteristics.

» Why do firms switch banks? • 19

fsrforum • volume 15 • issue #2

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.

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 relationship bank. This is because the relationship bank can use its superior information to make better informed credit decisions 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 presence 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 suggests 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 borrowers (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

20 • Why do firms switch banks?

(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 services. 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 informationproblematic 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

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. Results We 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 relationships. 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 motivations 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 relationships 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 bank In the introduction we had hypothesized that informationally opaque firms and firms facing financial distress are more likely to stay with their existing banks. To test these hypotheses, we begin by examining the impact of firm characteristics on firms’ propensity to enter into new banking relationships. We estimate the following panel model for all the firms in our sample of repeat deals: yit = F(_0 + _1Non Compustati + _2Sizei + _3Size2i + Controls), (1)

where the subscript i indicates the borrower and the subscript 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 Compustat is a dummy variable that identifies firms for which we do not have financial data in Compustat, and Size is the logarithm of the firm’s sales, as reported on Dealscan. We use both Non Compustat and Size as proxies for the firm’s information quality, because firms covered by Compustat and large firms are less likely to suffer from information problems. 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 informationally 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

» Why do firms switch banks? • 21

fsrforum • volume 15 • issue #2

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) indicates 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 following 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 economically 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 probability of switching to a new bank by 8.2%.

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

22 • Why do firms switch banks?

firms, which may be thought of as informationally opaque, are more likely to stay with their existing banks. Interestingly, 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 characteristics 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 mergers In 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

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

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 undergoes 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 propensity 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 interaction 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 consequent 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 Remarks In 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

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 propensity 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 nonCompustat 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 borrowing 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 following 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 question which we plan to address in our future research.

Why do firms switch banks? • 23

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Rotterdam. We vroegen Stijn naar zijn stage­ervaring

binnen een paar maanden mijn GVB halen.”

en start bij KPMG. En nu aan de slag als trainee?

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werk ik fulltime als trainee; ik ben sindsdien al veel

inhousedag ontdekte ik de mogelijkheden om je scriptie

leuke ervaringen rijker. Ik werk in wekelijks wisselende

bij een groot accountancykantoor te schrijven.

teams aan opdrachten voor verschillende bedrijven.

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

had opgedaan, wilde ik graag praktijkervaring op­

werk erg divers. Mijn scriptie is dus een mooie eerste

doen. Ik ben daarom alvast op zoek gegaan naar een

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potentiële werkgever om daar mijn scriptie te schrijven.”

aanraden om met KPMG kennis te maken en te gaan voor je scriptie!”

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Tijdens mijn kennismaking met KPMG vielen de

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gedrevenheid en no­nonsensementaliteit mij op.

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Dit houdt in dat je eerst een heel divers klantenpakket hebt en dat je daarna een keuze maakt voor de sector

KPMG Recruitment Centre

waarin je je gaat specialiseren. Voor mij voldoende redenen om mijn scriptie bij KPMG te schrijven.”

Laan van Langerhuize 1 1186 DS Amstelveen

Hoe heb je de scriptiestage ervaren?

(020) 656 7162

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

recruitment@kpmg.nl

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www.gaaan.nu

met het opdoen van praktijkervaring. Doordat je met

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

W W W.G A A A N . N U

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

Scriptietip # 3:

EEN INHOUDSOPGAVE IS HET HALVE WERK “Bepaal eerst het raamwerk van je scriptie, dan heb je houvast bij het schrijven.”

Kijk voor meer tips op facebook.com/kpmgscriptiecoach.

Of beter nog: schrijf je scriptie bij KPMG.

fsrforum • volume 15 • issue #2

Interview with Jeroen Scheelbeek Head of Senior Relationship Banking Wholesale Clients Netherlands

Roija Rasuli and Maaike Lanphen

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 productive 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.

Jeroen Scheelbeek joined Rabobank in 1997, where he worked in various senior positions in the areas of structured finance, corporate finance and relationship 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.

26 • Interview

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 competition. 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

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

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 propositions. 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 understanding. 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

 Interview • 27

fsrforum • volume 15 • issue #2

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 communication 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 more volatile 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 Agriculture 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

fsrforum • volume 15 • issue #2

Bedrijfspresentatie Mazars

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 internationale 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, hoogwaardige 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 dienstverlening 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 recruitment@mazars.nl. Of kijk op www.mazars.nl.

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, nietcreatieve 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

fsrforum • volume 15 • issue #2

Pensioenpremie betalen

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

Aanvankelijk werkte een mij bekende 65-plusser in het vooruitzicht 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 waardevast (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 periodieken 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.

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.

32 • Pensioenpremie betalen

In dat perspectief is het opmerkelijk dat de jongeren van vandaag 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.

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 jaarlijkse 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 verlopen als ik in mijn cijfervoorbeeld heb aangenomen. Verrassende promoties kunnen het middenloon opstuwen. Daartegen helpt een uitkering op basis van beschikbare premies.

Wat mij betreft is dat als oplossing van ongelijkheid veel aantrekkelijker 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.

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 koopkracht 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

De vraag is wat iemand liever doet:

gemiddeld 6% betalen of opklimmend tot bijna 15% gaan. 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.

Pensioenpremie betalen • 33

fsrforum • volume 15 • issue #2

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 longterm 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 relatively 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 relatively 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. Superficially, 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 socalled 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 limited 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 countries 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. Currently, 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.

One can doubt whether PPI banks and transaction banks should fall under a public safety net.

As a result, Leaseplan could start a PPI bank and collect insured deposits, even though Leaseplan 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 protected 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 different 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 powerful 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’ business 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.

Protect relationship banks from internet grasshoppers • 35

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fsrforum • volume 15 • issue #2

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 marriages 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 recommend 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 shortterm 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

fsrforum • volume 15 • issue #2

Word of the chairman

Sep Vermeulen

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.

FSR News

Column Mariska van Hoorik

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 sometimes, 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.

Column Roy Perlot

At the 10th of November the yearly active members day took place. First, we suited up in camouflage 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.

International Banking Cycle

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.

38 • FSR news

Active Members day

40 41 44 47

fsrforum • volume 15 • issue #2

Small-business lending Bank transfer Growing firms need to look beyond the big banks for credit Most recent newsupdate about the subject.

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 businesses 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 confidence 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 regulatory 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 customers. As banks retrench, GE Capital has a chance to build business relationships “that will survive for 10 or 20 years”.

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 fastgrowing 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

fsrforum • volume 15 • issue #2

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 International 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.

40 • FSR news

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.

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 – Accounting, 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

fsrforum • volume 15 • issue #2

FSR Member

Roy Perlot

Passport Name Roy Perlot Age 24 Residence London, UK Study Master in Finance & Investments, Bachelor in Business Management FSR event International Banking Cycle/ Financial Business Cycle Job at Morgan Stanley Department of job Investment Banking Division : Financial Institutions Team

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. However, 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 organizing the Financial Business Cycle.

How have you arranged your job?

I started applying to many internship vacancies in the Netherlands 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 transition 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 information 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…

FSR news • 41

fsrforum • volume 15 • issue #2

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 participating firms. During the presentations the students got to know what it is like to be an accountant 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 informal drink, the day had come to an end and the accountancy committee can look back on a very ­successful event.

42 • FSR news

fsrforum • volume 15 • issue #2

Finance Day 2012

On the 27th of November the Finance day took place at the Erasmus University 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 introduction 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

fsrforum • volume 15 • issue #2

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 workshop 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 firmwide 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 & Trading, 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 outperforming 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 companies involved and for the participating students.

FSR news • 45

fsrforum • volume 15 • issue #2

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 competitive environment.

46 • FSR news

fsrforum • volume 15 • issue #2

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

fsrforum • volume 15 • issue #2

FSR Activity Agenda 2012-2013

January Multinational Dinner Get in touch with the multinationals

Finance Dinner Get acquainted with the world of banking

January-April CleanTech Challenge Grow your green ideas!

February/March Multinational Battle Four multinationals, five battling cities, are you part of it?

Corporate Finance Competition Five star event: hotel, companies and participants!

April Female Business Tour It might be a men’s world but it would be nothing without women

May International Research Project Using your intellect for a charity!

Bachelor Accountancy Day Will you choose for a career in accounting?

European Finance Tour Exploring European financial world

48 • FSR news

www.werkenbijpwc.nl

Soms ben je tevreden

Soms drijf je jezelf tot het uiterste 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.

Kom verder op werkenbijpwc.nl

Neem voor meer informatie contact op met een recruiter: 088 792 87 77 werkenbijpwc@nl.pwc.com www.werkenbijpwc.nl/contact Volg werkenbijpwc op Facebook en Twitter

Š 2012 PricewaterhouseCoopers B.V. (KvK 3412089) Alle rechten voorbehouden.

© 2012: Ernst & Young Nederland LLP. All Rights Reserved.

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