May the Force Be with You: Exit Barriers, Governance Shocks, and Profitability Sclerosis in Banking

62 Pages Posted: 23 Jan 2019 Last revised: 21 Feb 2019

See all articles by Michael Koetter

Michael Koetter

Halle Institute for Economic Research

Carola Müller

University of Hohenheim

Felix Noth

Otto-von-Guericke-Universität Magdeburg; Halle Institute for Economic Research

Benedikt Fritz

Walter Eucken Institute

Date Written: 2018

Abstract

We test whether limited market discipline imposes exit barriers and poor profitability in banking. We exploit an exogenous shock to the governance of governmen-owned banks: the unification of counties. County mergers lead to enforced governmen-owned bank mergers. We compare forced to voluntary bank exits and show that the former cause better bank profitability and efficiency at the expense of riskier financial profiles. Regarding real effects, firms exposed to forced bank mergers borrow more at lower cost, increase investment, and exhibit higher employment. Thus, reduced exit frictions in banking seem to unleash the economic potential of both banks and firms.

Keywords: political frictions, governance, excess capacity, banking, market exit

JEL Classification: G21, G29, O16

Suggested Citation

Koetter, Michael and Müller, Carola and Noth, Felix and Fritz, Benedikt, May the Force Be with You: Exit Barriers, Governance Shocks, and Profitability Sclerosis in Banking (2018). Deutsche Bundesbank Discussion Paper No. 49/2018, Available at SSRN: https://ssrn.com/abstract=3319216

Michael Koetter (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/en/about-the-iwh/people/detail/michael-koetter/

Carola Müller

University of Hohenheim ( email )

Fruwirthstr. 48
Stuttgart, 70599
Germany
+49 711 459 23316 (Phone)
+49 711 459 23448 (Fax)

Felix Noth

Otto-von-Guericke-Universität Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany

Halle Institute for Economic Research

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/asp/person.asp?fnh&Lang=e&Abteilung=fin

Benedikt Fritz

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-Württemberg D-79100
Germany

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