Are Bigger Banks Better? Firm-Level Evidence from Germany

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 results are based on 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 and the real economy.

Automated summary

The study findings suggest that large banks do not always have the positive impact on the real economy as theoretically expected, and in fact, they may have negative effects on some borrowers and the real economy.