# **1.2. State-owned banks in developed nations**

State-owned banks that lend to SMEs and potentially serve as<sup>community banks is less of anissue in</sup> developed nations than in developing nations, botui because the market presence<sup>of state-ow,nedbanks is usually</sup> nuch less in developed nations and bec-use these nations<sup>typically have well-developed</sup> -rivate banking industries that lessen any need for government involvement. Nonetheless,<sup>most developednations do havestate-owned</sup> banks. A study of 92 developed and developing nations as of<sup>1995finds only 7 nations with no state ownership of</sup> banks - Canada, Cyprus, Hong Kong, New Zealand, South Africa,<sup>U.K.,andtheU.S.(La Porta,Lopez-de-</sup> Silanes, and Shleifer 2002).5 Because of their lesser importance<sup>in developed nations,we exclude state-owned</sup> banks from consideration from the definition of community banks<sup>in these countries.</sup>

## **1.3. Foreign-owned banks in developed**<sup>**nations**</sup>

roreign-owTieu' **baiI -Sii** .ay **bue** at signifi antdisadvar.aes In pIrviduiI reIaI,iooship<sup>**legII...,**</sup> servL SMEs in developed nations. Foreign-owned banks are usually<sup>large and headquartered far away from localSMEs,</sup> and so may suffer size- and distance-related disadvantages similar<sup>to those of large domestically-ownedbanks.In</sup> addition, differences in economic conditions, language, culture,<sup>and regulatorystructure from the bank's home</sup> market may compound problems in dealing with soft relationship<sup>information.</sup> There is very little direct evidence of the SME lending propensity of foreign-owned<sup>banksin developed</sup> nations, but several types of indirect evidence reinforce the<sup>argument that foreign-ownedbanks are unlikely to be</sup> oriented toward providing relationship-lending services to SNivs<sup>inuhese naLions.</sup><sup>**In**somiecases,'lvreign,-u-w--ud</sup> banking organizations engage in the "follow-yourr-customer"<sup>strategyof settingup officesin nations where their</sup> large corporate home-nation customers have foreign affiliates, and<sup>so arelikely to have a wholesaleorientation</sup> (e.g., Goldberg and Saunders 1981, Grosse and Goldberg<sup>1991).</sup> In addition, foreign-owned banking organizations in the U.S. tend to have a wholesale orientation<sup>(e.g.,DeYoung andNolle1996),and tobuy</sup> domestic banks that already have performance problems<sup>and so may findit difficult to extend credit (e.g., Peek,</sup> Rosengren, and Kasirye 1999). Most studies of the efficiency of<sup>foreign-ownedbanks in developed nations find</sup> these institutions to be less efficient on average than domestically-owned<sup>banks, with the possible exceptionof</sup>

> 5Governments of both developed and developing nations<sup>mayalsopromoteSMEfinancinginotherways.Some</sup> gove* r .er,ts subsi,dize 01 _lendi..g_ **_IA,_** _support_ fp..vat=sector barnks, such **as,** the Sprkassen **in** Germanuy.<sup>**OLthers**</sup> use government guarantees for SME loans, such as the Small Business<sup>Administration guaranteesintheU.S.Some</sup> governments also nromote access to financing is by organizing<sup>public credit information bureaus or by encouraging private-</sup> sector information exchanges. These exchanges may collect,<sup>summarize,and share data aboutloan applicantsthat might</sup> reduce lender costs or increase transparency in ways<sup>that increaseSMEcredit (seeJappelli and Pagano 2002).</sup>