Finance and growth in a bank-based economy: Is it quantity or quality that matters?

Abstract

With this paper we seek to contribute to the literature on the relation betweennance and growth. We argue that most studies in the eld fail to measure the quality of nancial intermediation but rather resort to using proxies on the size of nancial systems. Moreover, cross-country comparisons suer from the disadvantage that systematic dierences between markedly dierent economies may drive the result that nance matters. To circumvent these two problems we examine the importance of the quality of banks' nancial intermediation in the regions of one economy only: Germany. To approximate the quality of nancial intermediation we use cost eciency estimates derived with stochastic frontier analysis. We nd that the quantity of supplied credit is indeed insignicant when a measure of intermediation quality is included. In turn, the eciency of intermediation is robust, also after excluding banks likely to operate in multiple regions and distinguishing between dierent banking pillars active in Germany.

Banking performance and industry growth in an oil-rich economy: Evidence from Qatar

“…Using data for 7000 banks in 11 European countries over the period 1996-2004, the impact of the quality of finance on regional growth is found to be almost three times as large as that of the quantity channel. Furthermore, Koetter and Wedow (2010) find that bank efficiency as a measure of quality finance has a positive influence on promoting growth.…”

“…Using cost efficiency for Italy, Lucchetti et al (2001) also find that bank efficiency has a positive effect on real growth. See also Hasan et al (2009b) and Koetter and Wedow (2010), who find a valid effect of bank efficiency on aggregate economic growth. Overall, these results suggest that banking competition and efficiency are likely to contribute to Qatar's economic growth.…”

Economic and Social Development of the Southern and Eastern Mediterranean Countries

“…The quality effect is stronger in developed economies, while quantity increases are also beneficial in developing economies. Koetter and Wedow (2010) study the relationship between the quality of the financial system measured by cost efficiency and economic growth in 97 German economic planning regions. They suggest that the quality of the financial system contributes to economic growth while the quantity proxied by credit volume is not related to growth.…”

Islamic law and finance

“…They argue, as originally proposed by Robinson (1952) that ''where firm leads finance follows'' is frequently quoted. In other words, as quoted by Koetter and Wedow (2006), financial services are provided as a reaction to the demand by corporate firms, that is finance follows entrepreneurial activity. The statement is explicit in claiming that financial development takes place endogeneously in meeting the demand of expanding real economy.…”