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

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  • Bremus, Franziska
  • Buch, Claudia M.
  • Russ, Katheryn N.
  • Schnitzer, Monika

Abstract

Does the mere presence of big banks affect macroeconomic outcomes? Gabaix (2011) shows that idosyncratic shocks can have aggregate effects if the distribution of firm sizes in manufacturing follows a power law distribution. Our contribution is two-fold. First, we expand the theory of granularity to encompass the Bertrand competition frequently used in models of banking. Using a model with banks of heterogenous size who charge endogenous markups, we show under which conditions granular effects emerge. Second, we empirically assess the relevance of granularity effects in banking using a linked micro-macro dataset of more than 80 countries for the years 1996-2009. We show that the banking sector is granular, i.e. the right tail of the bank size distribution follows a power law. Also, the presence of big banks as measured by high market concentration magnifies the effect of idiosyncratic shocks on loan growth. Through this channel, idiosyncratic shocks affecting large banks impact upon macroeconomic outcomes. This effect is particularly important for countries with less developed banking systems.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 20226.

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Date of creation: 2013
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Publication status: Published in Beiträge zur Jahrestagung des Vereins für Socialpolitik 2013: Wettbewerbspolitik und Regulierung in einer globalen Wirtschaftsordnung - Session: Financial Markets and Macroeconomics B19-V2 (2013)
Handle: RePEc:lmu:muenar:20226

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Cited by:
  1. Franziska Bremus & Claudia M. Buch, 2013. "Granularity in Banking and Growth: Does Financial Openness Matter?," Discussion Papers of DIW Berlin 1346, DIW Berlin, German Institute for Economic Research.
  2. Mary Amiti & David E. Weinstein, 2013. "How Much do Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data," NBER Working Papers 18890, National Bureau of Economic Research, Inc.
  3. Franziska Bremus, 2013. "Cross-Border Banking, Bank Market Structures and Market Power: Theory and Cross-Country Evidence," Discussion Papers of DIW Berlin 1344, DIW Berlin, German Institute for Economic Research.
  4. Cacciatore, Matteo & Ghironi, Fabio & Stebunovs, Viktors, 2014. "The Domestic and International Effects of Interstate U.S. Banking," International Finance Discussion Papers 1111, Board of Governors of the Federal Reserve System (U.S.).
  5. Thomas Lux, 2014. "Emergence of a Core-Periphery Structure in a Simple Dynamic Model of the Interbank Market," Kiel Working Papers 1917, Kiel Institute for the World Economy.
  6. Claudia M. Buch & Oliver Holtemöller, 2014. "Do We Need New Modelling Approaches in Macroeconomics?," IWH Discussion Papers 8, Halle Institute for Economic Research.

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