This Paper empirically investigates the impact of distortions in the banking sector on the structure and dynamics of product markets as well as on firm level outcomes. Our analysis suggests that an increase in the efficiency of the banking industry can have first-order effects not only on the lending relationship between banks and firms, but also on the structure and dynamics of product markets overall. The particular reform we consider is the deregulation of the French banking industry in the mid 1980s. This deregulation eliminated government interference in bank lending decisions and allowed French banks to compete more freely in the credit market. Post deregulation, we find that banks are less willing to bail out poorly performing firms and that these firms experience a steeper increase in the cost of capital. Subsequently, firms in the more bank-dependent industries have a somewhat higher propensity to undertake restructuring measures. At the industry-level, we observe an increase in asset and job reallocation in the bank dependent sectors, mostly due to higher entry and exit rates of firms. We also find an improvement in allocative efficiency across firms as well as a decline in industry concentration ratios. Overall, these findings are consistent with a model where distortions in bank lending create artificial barriers to entry in the real sectors of the economy. A more efficient banking sector therefore appears to play an important role in fostering a Schumpeterian process of ‘creative destruction’.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
4488.
Find related papers by JEL classification: G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
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Xavier Boutin & Giacinta Cestone & Chiara Fumagalli & Giovanni Pica & Nicolas Serrano-Velarde, 2009.
"The Deep-Pocket Effect of Internal Capital Markets,"
CSEF Working Papers
217, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 05 Oct 2009.
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