Asset purchase programmes (APPs) may insulate banks from having to terminate relationships with unproductive customers. Using administrative plant and bank data, we test whether APPs impinge on industry dynamics in terms of plant entry and exit. Plants in Germany connected to banks with access to an APP are approximately 20% less likely to exit. In particular, unproductive plants connected to weak banks with APP access are less likely to close. Aggregate entry and exit rates in regional markets with high APP exposures are also lower. Thus, APPs seem to subdue Schumpeterian cleansing mechanisms, which may hamper factor reallocation and aggregate productivity growth.

We study the impact of higher capital requirements on banks’ balance sheets and their transmission to the real economy. The 2011 EBA capital exercise is an almost ideal quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that treated banks increase their capital ratios by reducing their risk-weighted assets, not by raising their levels of equity, consistent with debt overhang. Banks reduce lending to corporate and retail customers, resulting in lower asset, investment, and sales growth for firms obtaining a larger share of their bank credit from the treated banks.

Finding the proper balance between state and market is challenging. Especially in banking (Stiglitz, 1993). Banks in their function as financial intermediaries are risky and inherently prone to failure (Diamond and Dybvig, 1983; Diamond, 1984). But they provide services of vital importance to the economy in the form of payment services, credit supply for investments, inter-temporal liquidity transformation, or management of savings accounts. Consequently, the stability of the banking and financial sector is of public interest. In the least, the financial crisis was an unpleasant reminder to the industrialized world about the severe repercussions of unstable banking systems.

The paper investigates whether diversification/focus across assets, industries and borrowers affects bank performance when banks’ abilities (screening and monitoring) are considered. The initial results show that diversification (focus) at the asset, industry and borrower levels is expected to decrease (increase) returns. However, once banks’ screening and monitoring abilities are controlled for, the effect of diversification/focus either gets weaker or disappears. Further, in some cases, these abilities enhance banks’ long-run performance, but in others they prove to be costly, at least, in the short run. Thus, the level of monitoring and screening abilities should be taken into consideration in understanding, planning and implementing diversification/focus strategies.

This study analyzes if regionally affiliated Federal Open Market Committee (FOMC) members take their districts’ regional banking sector instability into account when they vote. Considering the period 1979–2010, we find that a deterioration in a district's bank health increases the probability that this district's representative in the FOMC votes to ease interest rates. According to member-specific characteristics, the effect of regional banking sector instability on FOMC voting behavior is most pronounced for Bank presidents (as opposed to Governors) and FOMC members who have career backgrounds in the financial industry or who represent a district with a large banking sector.

This paper studies the role of political factors for determining the impact of banking sector distress on sovereign bond yield spreads for a sample of 19 emerging market economies in the period 1994–2013. Using interaction models, I find that the adverse impact of banking sector distress on sovereign solvency is less pronounced for countries with a high degree of political stability, a high level of power sharing within the government coalition, a low level of political constraint within the political system, and for countries run by powerful and effective governments. The electoral cycle pronounces the bank risk–sovereign risk transfer.

This paper investigates the finance-growth nexus where bank credit is decomposed into investment, consumption, and working capital credit. From a panel dataset of provinces in Indonesia, it documents that higher financial development measured by financial deepening and financial intermediation exhibits an inverted U-shaped relationship with economic growth. This non-linear effect of financial deepening is driven by both investment credit and consumption credit. These results suggest that too much investment credit and, to a lesser extent, consumption credit are detrimental to economic growth. Ultimately, only financial intermediation associated with working capital credit has a positive and monotonic impact on economic growth.

A distinctive aspect of the recent financial crises is that they emerged primarily in the industrial world. Since the 2008-2009 global financial crisis emerging countries have been therefore confronted with financial shocks triggered at the core of the international financial system, affecting the volatility of capital flows worldwide. Emerging countries’ dependence on capital and trade flows, combined with a large presence of foreign-owned banks, has been identified as a central driver of the cross-border transmission of these crises (see IMF, 2009). While historical events such as the Latin American debt crisis or the 1997 Asian financial crisis highlighted the importance of sound balance of payments and inflation targeting policies at the macroeconomic level, the global financial crisis has revealed the importance of weighing the costs and benefits of banking globalization. This is foremost important from a policy perspective, since emerging countries faced for the first time in decades an external shock in a context free of large local macroeconomic imbalances, having to adapt their traditional policy framework to new challenges. This has been emphasized, among others, by the former Chairman of the U.S. Federal Reserve Ben Bernanke. In particular, this changing scenario implied that microeconomic aspects involved in the cross-border transmission of shocks gained increasing momentum in the international policy debate (see for instance Freixas et al., 2015).

This paper investigates the relationship between local banking structures and SMEs’ access to debt and performance. Using a unique dataset on bank branch locations in Poland and firm-, county-, and bank-level data, we conclude that a strong position for local cooperative banks facilitates access to bank financing, lowers financial costs, boosts investments, and favours growth for SMEs. Moreover, counties in which cooperative banks hold a strong position are characterized by a more rapid pace of new firm creation. The opposite effects appear in the majority of cases for local banking markets dominated by foreign-owned banks. Consequently, our findings are important from a policy perspective because they show that foreign bank entry and industry consolidation may raise valid concerns for SME prospects in emerging economies.