> This paper studies barriers to cross-border bank lending to firms in the euro area and their implications for credit allocation and aggregate output. Using granular credit registry data, we develop a microeconometric framework to estimate cross-border wedges in relationship formation, loan pricing, and bank entry, and embed these estimates in a quantitative general equilibrium model.
> Empirically, barriers to cross-border bank entry and to cross-border lending relationships are the dominant friction, far exceeding distortions in interest rates or loan quantities conditional on existing relationships. We further show that these extensive-margin barriers are strongly associated with differences in national regulatory frameworks, based on a novel dataset of policy distances across euro area countries. Together, these findings point to regulatory fragmentation as a key impediment to financial integration.
> By combining micro-level identification with a structural model, the paper finds that reducing regulatory barriers and advancing the European Banking Union could generate meaningful aggregate gains for the euro area, though with considerable heterogeneity across member states. Importantly, the first-order gains arise not from improved credit allocation across firms or intensified competition, but from broader access to foreign financial intermediaries and the resulting economy-wide decline in firms’ effective cost of capital.
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Germany: we believe in a strong banking union with a unified single market, removing barriers for competition across borders.
What do you think about a successful Italian bank purchasing a flailing German bank?
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> This paper studies barriers to cross-border bank lending to firms in the euro area and their implications for credit allocation and aggregate output. Using granular credit registry data, we develop a microeconometric framework to estimate cross-border wedges in relationship formation, loan pricing, and bank entry, and embed these estimates in a quantitative general equilibrium model.
> Empirically, barriers to cross-border bank entry and to cross-border lending relationships are the dominant friction, far exceeding distortions in interest rates or loan quantities conditional on existing relationships. We further show that these extensive-margin barriers are strongly associated with differences in national regulatory frameworks, based on a novel dataset of policy distances across euro area countries. Together, these findings point to regulatory fragmentation as a key impediment to financial integration.
> By combining micro-level identification with a structural model, the paper finds that reducing regulatory barriers and advancing the European Banking Union could generate meaningful aggregate gains for the euro area, though with considerable heterogeneity across member states. Importantly, the first-order gains arise not from improved credit allocation across firms or intensified competition, but from broader access to foreign financial intermediaries and the resulting economy-wide decline in firms’ effective cost of capital.
Germany: we believe in a strong banking union with a unified single market, removing barriers for competition across borders.
What do you think about a successful Italian bank purchasing a flailing German bank?
Germany: NO! Not like that!