Small Banks and Local Economic Development

Abstract

This paper discusses the effects of small banks on economic growth. We first theoretically show that small banks operating at a regional level can spur local economic growth. As compared with big interregional banks, small regional banks are more effective in promoting local economic growth, especially in regions with lower initial endowments and severe credit rationing. We then test the model predictions using a sample of German banks and corresponding regional statistics. We find that small regional banks are more important funding providers in regions with low access to finance. The empirical results support the theoretical hypotheses.JEL Classification: G21, O16, R11. for their helpful comments. We sincerely thank the referee for his/her detailed comments. Errors and omissions remain the responsibility of the authors.

Spillovers of banking regulation: the effect of the German bank levy on the lending rates of regional banks and their local competitors

“…The main clientele for both banking groups are private customers and local businesses (Hakenes & Schnabel, 2011;Hakenes et al, 2015). In particular, these banks are the main lenders for SMEs which have a share of about 40% of the business volume and employ two thirds of the German working force.…”

Regional bank efficiency and its effect on regional growth in “normal” and “bad” times

“…An efficient bank should support growth of an economy through its good intermediary function, i.e. by selecting the optimal projects for funding while assigning the optimal costs given risks at the same time (Hakenes et al, 2015).…”

“…As a further innovation to the literature, we demonstrate that the strength of the relationship between financial quality and productivity growth is dependent on the level of development of a region. Firms in less developed regions have more problems in obtaining funding and investments have a relatively higher marginal productivity (Guiso et al, 2004;Hakenes et al, 2015). If such a region includes more efficient banks, which are able to identify the right firms to finance, it, firstly, gains credits for its firms and, secondly, catches up faster in productivity.…”

Cyclicality of SME Lending and Government Involvement in Banks

“…These banks neither underperform nor do they take more risks than other banks. Moreover, Hakenes et al (2015) find that the performance of savings banks in Germany is positively related to local economic development. They document a beneficial effect of local banking on economic growth, while we document a beneficial effect on the cyclicality of SME lending.…”

“…If such banks effectively follow their public mandate, the lower cyclicality should be credit supply-side driven and not a consequence of differences in their borrower structures. Recent studies show that these banks help reduce financial constraints of SMEs (Behr et al, 2013) and that the performance of these banks is positively related to local economic development (Hakenes et al, 2015).…”