Today the ESRI has published a research bulletin summarising a paper entitled: THE BANKING SECTOR AND RECOVERY IN THE EU ECONOMY By Ray Barrell (NIESR), Tatiana Fic (NIESR), John Fitz Gerald (ESRI), Ali Orazgani (NIESR) and Rachel Whitworth (NIESR)
This paper considers how banks within Europe have become larger and more international as Europe has moved towards a unified financial services market, but this trend has been reversed since the crisis. In order to establish the effect of these structural changes on output in Europe, we use a micro data set to investigate the impact of size (as measured by asset size) on banks’ net interest margins. We show that larger banks offer lower borrowing costs for firms, which raises sustainable output. We then use NiGEM to look at the impact of banks becoming smaller and moving back into their home territory. We investigate the impacts on output according to country size, showing that the effects are generally larger in small countries, and also larger in economies that are more dependent on bank finance for their business investment decisions.
The Research Bulletin is available here.
The full version of the article is available at a fee here.