Firm Subsidies, Financial Intermediation, and Bank Risk
IWH Discussion Papers,
We study whether government subsidies can stimulate bank funding of marginal investment projects and the associated effect on financial stability. We do so by exploiting granular project-level information for the largest regional economic development programme in Germany since 1997: the Improvement of Regional Economic Structures programme (GRW). By combining the universe of subsidised firms to virtually all German local banks over the period 1998-2019, we test whether this large-scale transfer programme destabilised regional credit markets. Because GRW subsidies to firms are destabilised at the EU level, we can use it as an exogenous shock to identify bank responses. On average, firm subsidies do not affect bank lending, but reduce banks’ distance to default. Average effects conflate important bank-level heterogeneity though. Conditional on various bank traits, we show that well capitalised banks with more industry experience expand lending when being exposed to subsidised firms without exhibiting more risky financial profiles. Our results thus indicate that stable banks can act as an important facilitator of regional economic development policies. Against the backdrop of pervasive transfer payments to mitigate Covid-19 losses and in light of far-reaching transformation policies required to green the economy, our study bears important implications as to whether and which banks to incorporate into the design of transfer Programmes.
IWH Bankruptcy Research
IWH Bankruptcy Research The Bankruptcy Research Unit of the Halle Institute for...
Did GRW Investment Grants Contribute to the Catching-up of East Germany?
Konferenzband "30 Jahre Deutsche Einheit", März
The joint task force ‘Improving Regional Economic Structures’ (GRW) is the most important regional policy scheme in Germany and was extensively used to support the economic transformation process in the new states after reunification. The article provides an overview of national and international causal analytical studies on the effects of investment grants. The analysis shows that such programmes have positive effects on development — especially of employment and income. It not only affects the subsidised establishment benefit from this type of support, but the regions as a whole. Even though the studies do not go back to the early 1990s, we can conclude that the GRW contributed to economic development in East Germany — and to the catching-up process.
Productivity: More with Less by Better Available resources are scarce. To sustain our...
Centre for Evidence-based Policy Advice
Centre for Evidence-based Policy Advice (IWH-CEP) ...
Demographic Change Dossier ...
Four Research Clusters ...
East Germany Rearguard Only investments in education will lead to a further catch-up ...
Establishing Evidence-based Evaluation Methods for Subsidy Programmes in Germany (EVA-KULT)
EVA-KULT Establishing Evidence-based Evaluation Methods for Subsidy Programmes in...