Public banks face a public contract to provide credit access to firms and households within their business district. Closely related to that, cooperative banks aim to support their members. Both are asked to finance projects as long as economically sustainable. Bank owners grand additional payment that reduce refinancing costs. It is argued, that private banks are disadvantaged due to these refinancing cost differentials and competition is distorted. While the strategy set of public and cooperative banks is fixed, private banks are free to choose which strategy they want to apply. In this paper I analyze, whether private banks adopt a different lending strategy. If private banks act as “hard-nosed” bankers as firms become financially distressed, the probability of market exit should be higher compared to firms financed by public or cooperative banks. In order to test this empirically probit models are employed estimating the probability of market exit for firms that became financially distressed in the years between 2000 and 2005. A Heckman variation of the probit model controls for potential selection bias due to the data generating process. Information on firm's financing behavior, entrepreneurial education, as well as internal and external factors influencing a firm's market exit are used as covariates. Results show that firms with a savings or a cooperative bank as their main bank present a lower probability of exiting the market than those with private banks. The reasons for different lending strategies remain unclear. A possible explanation would be that private banks adopt stricter rules when firms become financial distressed. Private banks could ask for additional control rights or rule out renegotiation in general. Private banks credit portfolio risk reduces indirectly if high-risk firms anticipated the behavior of the private banks and self select to public or cooperative banks. But the approximated credit portfolio risk by bank types, based on firms credit rating scores, indicate that private banks bear higher risk compared to public or cooperative banks.


financially distressed firms, bank lending, public banks, cooperative banks