Working Paper: CEPR ID: DP15769
Authors: Kilian Huber
Abstract: The effects of large banks on the real economy are theoretically ambiguous and politically controversial. I identify quasi-exogenous increases in bank size in postwar Germany. I show that firms did not grow faster after their relationship banks became bigger. In fact, opaque borrowers grew more slowly. The enlarged banks did not increase profits or efficiency, but worked with riskier borrowers. Bank managers benefited through higher salaries and media attention. The paper presents newly digitized microdata on German firms and their banks. Overall, the findings reveal that bigger banks do not always raise real growth and can actually harm some borrowers.
Keywords: large firms; economies of scale; too big to fail; bank size; bank regulation; financial regulation; firm employment; manager compensation; german history
JEL Codes: E24; E44; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bank size (G21) | firm outcomes (G32) |
| larger banks (G21) | firm performance (L25) |
| opaque borrowers (G33) | growth rate (O40) |
| larger banks (G21) | processing soft information (L86) |
| bank size (G21) | profitability and efficiency (L21) |
| larger banks (G21) | borrower growth (G51) |