Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity

43 Pages Posted: 30 Jan 2014

See all articles by Franziska Bremus

Franziska Bremus

German Institute for Economic Research (DIW Berlin)

Claudia M. Buch

Deutsche Bundesbank

Katheryn Niles Russ

University of California, Davis; National Bureau of Economic Research

Monika Schnitzer

University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2013

Abstract

Does the mere presence of big banks affect macroeconomic outcomes? In this paper, we develop a theory of granularity (Gabaix, 2011) for the banking sector, introducing Bertrand competition and heterogeneous banks charging variable markups. Using this framework, we show conditions under which idiosyncratic shocks to bank lending can generate aggregate fluctuations in the credit supply when the banking sector is highly concentrated. We empirically assess the relevance of these granular effects in banking using a linked micro-macro dataset of more than 80 countries for the years 1995-2009. The banking sector for many countries is indeed granular, as the right tail of the bank size distribution follows a power law. We then demonstrate granular effects in the banking sector on macroeconomic outcomes. The presence of big banks measured by high market concentration is associated with a positive and significant relationship between bank-level credit growth and aggregate growth of credit or gross domestic product.

Keywords: Granularity, concentration, bank competition, macroeconomic outcomes, bank markups

JEL Classification: E32, G21

Suggested Citation

Bremus, Franziska and Buch, Claudia M. and Russ, Katheryn Niles and Schnitzer, Monika, Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity (December 2013). DIW Berlin Discussion Paper No. 1348. Available at SSRN: https://ssrn.com/abstract=2387610 or http://dx.doi.org/10.2139/ssrn.2387610

Franziska Bremus

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Claudia M. Buch (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Katheryn Niles Russ

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Monika Schnitzer

University of Munich - Department of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 2217 (Phone)
+49 89 2180 2767 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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