Working Paper: CEPR ID: DP10805
Authors: Isabel Schnabel; Christian Seckinger
Abstract: Using industry data from Eurostat and applying the Rajan-Zingales methodology, we investigate the real growth effects of banking sector integration in the European Union. Our sample stretches from 2000 until 2012 and includes the phase of rapid financial integration before the global financial crisis as well as the following phase of financial fragmentation and bank deleveraging. We find evidence that banking sector integration had a more than four times stronger growth effect during the crisis than in normal times. Growth effects are also stronger in times of domestic bank deleveraging. We conclude that concerns of European policy makers about fragmentation in the European banking sector are justified and that future reintegration is an important building block of future growth perspectives in the European Union.
Keywords: Cross-border lending; Economic growth; European Union; Financial crisis; Financial fragmentation; Financial integration; Foreign banks; Rajan-Zingales methodology
JEL Codes: F36; G01; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banking sector integration (F65) | industry growth differentials (O49) |
| foreign bank assets (F65) | industry production growth differentials (O49) |
| foreign bank assets (F65) | mitigate negative impacts of domestic bank deleveraging on industry growth (F65) |
| foreign capital (F21) | insurance mechanism during financial distress (G33) |
| banking sector integration (F65) | economic stability and growth in the EU (O52) |
| ongoing fragmentation in the European banking sector (F65) | substantial losses in industry production growth (L16) |