Bank Bias in Europe: Effects on Systemic Risk and Growth

61 Pages Posted: 24 Jun 2015  

Sam Langfield

European Central Bank - European Systemic Risk Board Secretariat

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: June 22, 2015

Abstract

Europe’s financial structure has become strongly bank-based – far more so than in other economies. We document that an increase in the size of the banking system relative to equity and private bond markets is associated with more systemic risk and lower economic growth, particularly during housing market crises. We argue that these two phenomena arise owing to an amplification mechanism, by which banks overextend and misallocate credit when asset prices rise, and ration it when they drop. The paper concludes by discussing policy solutions to Europe’s “bank bias”, which include reducing regulatory favouritism towards banks, while simultaneously supporting the development of securities markets.

Keywords: bank regulation; banks; financial structure; systemic risk

JEL Classification: G1, G2

Suggested Citation

Langfield, Sam and Pagano, Marco, Bank Bias in Europe: Effects on Systemic Risk and Growth (June 22, 2015). ECB Working Paper No. 1797. Available at SSRN: https://ssrn.com/abstract=2621554

Sam Langfield

European Central Bank - European Systemic Risk Board Secretariat ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marco Pagano (Contact Author)

University of Naples Federico II - Department of Economics and Statistics ( email )

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy
+39 081 675306 (Phone)
+39 081 7663540 (Fax)

Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Einaudi Institute for Economics and Finance (EIEF)

Via Sallustiana, 62
Rome, 00187
Italy

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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