Academic journal article The International Journal of Business and Finance Research

Bank Acquisitions and Loan Officer Authority: Evidence from French Banks

Academic journal article The International Journal of Business and Finance Research

Bank Acquisitions and Loan Officer Authority: Evidence from French Banks

Article excerpt

ABSTRACT

The purpose of this article is to study how the delegation of decision-making rights towards Small and medium-sized enterprises loan officers evolves as a result of bank mergers and acquisitions. Using the framework of organizational architecture theory as our starting point, we examine here one of its three components: the decentralization of decision-making rights. Our survey of Small and medium-sized enterprises loan officers in two recently acquired French banks shows that these officers are often allowed to use their initiative. However, bank consolidation operations do not increase the decentralization of authorization rights. We even observe in such circumstances an increase in hierarchical control. Ultimately, we cannot conclude that in consolidated banks small and medium-sized enterprises loan officers enjoy greater autonomy.

JEL: G21, G34

KEYWORDS: Bank Mergers and Acquisitions, Decentralization of Decision-Making Rights, Theory of Organizational Architecture, Soft Information, Bank-SME Relations

INTRODUCTION

The literature highlights different effects on the volume of loans granted (Berger et al., 1998; 1999) and on the nature of relationships between banks and small and medium-sized enterprises (SMEs) arising from the organizational characteristics of banks investigated (Stein, 2002; Cole et al., 2004; Berger et al., 2005a et 2005b; Mian, 2006). Previous work has made it clear that small business lending needs to be relationship lending. This facilitates the collection of soft information that is required for efficient decision making (Berger and Udell, 2002) and reduces the problem of informational opacity which is a feature of this kind of firm. Prior studies have also shown that small banks with flexible structures, are well adapted to collecting soft information and have an advantage in this compared with large, organisationally complex banks (Stein, 2002). There is then a significant link between the organisational characteristics of a bank and the way it finances SMEs (Berger et al., 2005b; De Haas et al., 2010; Beck et al., 2011; Ongena and Sendinez-Yüncü, 2011). Several studies, the majority of which were carried out in the United States (Carter et al., 2004; Cole et al., 2004; Berger et al., 2005b) but also in Europe (Degryse et al., 2011) and in Japan (Ogura & Uchida, 2008), have analyzed the effects of bank reorganization, following a merger or acquisition, on the conditions for granting loans to SMEs. The results of these previous studies vary greatly depending on the type of acquisition, the size of the organizations concerned, the organizational complexity of the consolidated banks, the size of the sample studied and the econometric tool chosen. These studies show negative, positive or insignificant results. However, most of this work offers no convincing explanations and concentrates exclusively on the volume of loans granted by the consolidated banks.

Berger and Udell (2002; 2006) consider that the decision to grant loans to SMEs results from the interaction between several actors at different hierarchical levels. Any change in the organizational structure of the bank is liable to affect the nature of the bank-SME relationship. In this sense, banking acquisitions, by causing organizational changes, can have a significant impact on the volume of SME lending and condition the nature of the relationship. A study of these consequences must necessarily be based on an analysis of the organizational mechanisms that regulate small business lending decisions. Despite the large amount of research dealing with the primordial role of relationship lending for opaque SMEs as opposed to standard financing, very little of it looks at the bank-SME relationship from an organizational point of view.

Unlike previous research, our work analyses changes in the organizational mechanisms that regulate lending decisions. When banks join together, they undergo important organizational changes. …

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