AFFI International Conference 2017

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Banks and Regional Economic Activity

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In this paper we revisit the question whether negative shocks to banks have adverse real economic effects. We propose a new identification strategy to overcome endogeneity problems. We analyze German savings banks. These banks are small, but are only active in a defined region. Within their area of activity they are large. When a savings bank is in financial distress it is often merged with a neighbouring savings bank. We interpret the distressed merger as an exogenous negative shock to the acquiring savings bank and find that the growth rates of investments and GDP decrease while the number of insolvencies increases in the years after the merger. Several robustness checks support our claim that there is indeed a causal effect from shocks to savings banks to regional economic activity.


Valeriya Dinger    
University of Osnabrueck

Erik Theissen    
University of Mannheim


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