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Abstract:

CEP discussion paper
Are bigger banks better? Firm-level evidence from Germany
Kilian Huber
December 2020
Paper No' CEPDP1735:
Full Paper (pdf)

JEL Classification: E24; E44; G21; G28


Tags: bank regulation; big banks; bank size; economic growth; brexit; economic geography; employment; globalisation; productivity; technological change

The effects of large banks on the real economy are theoretically ambiguous and politically controversial. I identify quasi-exogenous increases in bank size in post-war Germany. I show that firms did not grow faster after their relationship banks became bigger. In fact, opaque borrowers grew more slowly. The enlarged banks did not increase profits or efficiency, but worked with riskier borrowers. Bank managers benefited through higher salaries and media attention. The paper presents newly digitized microdata on German firms and their banks. Overall, the findings reveal that bigger banks do not always raise real growth and can actually harm some borrowers.