Who's afraid of big bad banks? Bank competition, SME, and industry growth

Posted by D. Daniel Sokol

Robert Inklaar (U Groningen), Michael Koetter (Frankfurth School of Finance and Management), and Felix Noth (Goethe University) ask Who's afraid of big bad banks? Bank competition, SME, and industry growth.

ABSTRACT: We test how bank market power influences technical change and resource allocation of informationally opaque firms. We use a dataset with approximately 700,000 firm-year observations of German small and medium-sized enterprises (SME) to identify the effect of bank market power using the dependence on external finance per industry and the regional demarcation of the German banking market. Market power generally spurs aggregate SME growth. Banks need to realize sufficient margins to generate useful private information. Bank market power spurs both technical change and reallocation of resources, but it reduces SME growth in industries that depend heavily on external finance.