Banking Market Structure, Liquidity Needs, and Industrial Growth Volatility

Abstract

While the existing literature acknowledges the effect of banking structure on industrial growth as well as the effect of financial development on industrial growth and its volatility, we examine whether banking structure, given financial development, exerts any nontrivial effect on industrial growth volatility. We show that bank concentration magnifies industrial growth volatility, but reduces the volatility in sectors with higher external liquidity needs. The reduction in industrial growth volatility mostly reflects the smoothing in the volatility of real value added per firm growth. A variety of sensitivity checks show that our findings remain for different model specifications, banking market structure measures, liquidity need indicators, and omitted variables.

Bank Competition, Economic Growth, and Nonlinearity: A Nonparametric Approach

“… Huang et al . () employ the Rajan and Zingales () set‐up to analyze the link between banking market structure and the volatility of growth; their results suggest a differential impact of banking concentration on industrial growth volatility across sectors. …”

“…I draw on the expositions byCetorelli (1997) as well asClaessens and Laeven (2005) who provide an extensive review of the theoretical contributions in this area.4 Beck et al (2004) show yet another dimension, namely that in low-income countries, more competition among banks makes access to finance easier, which represents an additional rationale for a positive impact of bank competition on growth.5 Huang et al (2012) employ theRajan and Zingales (1998) set-up to analyze the link between banking market structure and the volatility of growth; their results suggest a differential impact of banking concentration on industrial growth volatility across sectors.…”