results also in an unhedgeable position with respect to industry. Furthermore, we have shown in Harm [18] that small banks are also more exposed to small firms. All these factors lead to a significantly larger bank specific risk stemming just from the fate of being small. This disadvantage compared to the larger banks can obvio;zsly lead to a larger demand for information to assess the individual risk, as it is covered to a lesser extent through portfolio diversification.

Secondly, the large banks also translate the pooled information of accounting data into exposure policies with respect to branches or other charactexnstic **s** o that the use of the pooled d%ta for cross-sectional comparison with an individual firm may not be viewed as important, and the data needed for exposure policies need not be as detailed as if they were used for credit analysis. The absence of systemic exposure guidelines in the case of the Sparkassen and cooperative banks coupled with the more client oriented information gathering mechanisms may actually turn out to be an advantage for the small banks.

No firm can unambigously be assigned to any one industry, and a limit on industry exposure can effectively hinder a branch of a large bank from making a loan to a creditworthy client - a typical example of resource misallocation due to the limits of information processing in a centralized institution. It is likely that the Sparkassen and cooperative banks make good on their diversification disadvantage by not being exposed to industry limits and instead spending more energy on gathering information on individual risks.

Viewing bank size and the structure of the different banking groups' clienteles as external variables, the a'uove analysis suggests that large and small banks have structured the gathering and use of information optimally depending on their situation. Whether the size of the average client also determines the size of the lending bank is subject to speculation. Why should the branch manager of a small branch in a big bank be in a better or worse position to lend efficiently to small businesses? He might be at a disadvantage, if exposure limits lead to higher misallocations of resources in the case oI lending to small firms as opposed to large firms, but that is still an unsettled issue.

One last reason, probably the most speculative, of explaining the observed differences in information gathering policy is that the smaller banks have a clientele of firms that are often owner-managed, with less potential influence of the banker on the owner-manager as in the case of an employed manager, who may be more prone to accept the banker's authority, especially if the banker is a member of his firm's Board.

# 2.3. **Direct** and indirect consulting activities

Accounting data have above been identified as the most basic pieces of information that a bank can base its financing decisions on. As a bank needs to economize on the costs of information acquisition and has to cover the entire spectrum of firms in the real sectc, the general level of analysis cannot go beyond summary statistics. .However, there are a number of instances, where the bank has to go beyond that level of analysis in order to assess the 4