Bank-SMEs relationships and banks' risk-adjusted profitability

This research investigates how SME performance, the typology of loans and the length and scope of relationships between small banks and SMEs affect the margin adjusted for the risk that each customer generates. After analysing 4285 firm-year observations from Finnish banks, the quality of a SME's performance is found to be the major factor in explaining the risk-adjusted profitability of banks. However, the length and scope of a relationship and the loan dimensions also play an important role.