Small Banks and Local Economic Development
52 Pages Posted: 5 Feb 2014
Date Written: January 29, 2014
This paper discusses the effects of small banks on economic growth. We first theoretically show that small banks operating at a regional level can spur local economic growth. As compared with big interregional banks, small regional banks are more effective in promoting local economic growth, especially in regions with lower initial endowments and severe credit rationing. We then test the model predictions using a sample of German banks and corresponding regional statistics. We find that small regional banks are more important funding providers in regions with low access to finance. The empirical results support the theoretical hypotheses.
Keywords: small banks, regional economic growth
JEL Classification: G21, O16, R11
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