Influence of banking systems on the economy

Influence of banking systems on the economy

Banks perform similar functions all over the world. These include lot size transformation, term transformation, and risk transformation as well as other financial intermediation tasks. Nevertheless, the banking systems around the world are very different. For example, the United Kingdom has few but very large commercial banks. In contrast, Germany, for example, with its numerous cooperative banks, savings banks and special banks, has many credit institutions but only a few large banks. How do the different banking systems affect the local economy and companies? Do the different business models and corporate structures have an impact on financial stability? Securing financial stability is elementary due to the close interaction between the economy and credit institutions. Accordingly, it is in the highest public interest to ensure a stable banking system. Various institutions at regional, national and supranational levels are responsible for banking supervision and regulation. How does supervision relate to the design of a banking system? Does regulation take into account the different banking systems or do other factors play a role? The aim of our research cluster "Influence of banking systems on the economy" is to analyse these and other questions.

Ongoing research projects:

How do banking systems influence regional wealth and inequality?

Queen Katharina of Württemberg already suspected the positive influence banks can have. For this reason, after the famine of 1817, not only did she found our University of Hohenheim the following year, but also the „Württembergische Spar-Casse“ (a predecessor of the LBBW) to encourage savings.

For our project we combine banking and economic data of five EU countries. We do not consider aggregated information at national level, but we compare data at the level of NUTS 2 regions within Germany, France, Italy, Spain and Austria. We analyse how characteristics of regional banking systems affect the local economy. Characteristics of such banking systems can be the corporate forms (private banks, cooperative banks, savings banks) or the business activity (e.g. commission or lending business). Our results show that local savings banks and credit unions have a positive influence on regional wealth. A regional banking system with, on average, smaller banks that focus mainly on interest business contributes to a reduction of inequality.

How do regional banking systems influence local businesses and especially small and medium-sized companies? 

From a theoretical perspective, there are many arguments in favour of regional banks and their positive influence on local businesses. However, there are also economic arguments against the thesis that a diverse banking system with local banks makes sense. For example, it can be discussed whether a few large centralised banks operate more efficiently.

From a business management perspective, the research project analyses how regional banking systems relate to the local business enterprises at the level of the administrative districts. As a basis, we take the banking data set of the project "How do banking systems influence regional inequality and local prosperity?" and combine it with the information from almost 850,000 companies in Germany, France, Italy, Spain and Austria. Our results show that regional banking systems with smaller banks on average lead to better profitability of enterprises in the respective region. This also applies if banks in a region have higher average net interest income. The results apply to small and medium-sized enterprises in particular.