Small Banks and Local Economic Development

Abstract

This paper discusses the effects of small banks on local economic growth. We first theoretically show that small banks operating at a regional level can spur local economic growth; the effect is stronger in regions with lower initial endowments. We then test the model predictions using a sample of German savings banks and corresponding regional statistics. We find that small regional banks are more important funding providers in underdeveloped regions suggesting that they may help prevent capital resources flowing from poor to rich regions. The empirical results support the theoretical hypotheses.

Keywords: banking structure, regional banks, regional economic growth

JEL Classification: G21, H54, R11