Bank Efficiency and Regional Growth in Europe: New Evidence from Micro-Data

Abstract

This paper examines whether European regions which incorporate banks with a higher intermediation quality grow faster and are more resilient to negative shocks than its less efficient peers. For this purpose, we measure a bank's intermediation quality by estimating its pro t and cost efficiency while taking the changing banking environment after the financial crisis into account. Next, we aggregate the efficiencies of all banks within a NUTS 2 region to obtain a regional proxy for fi nancial quality in twelve European countries. Our results show that relatively more pro t efficient banks foster growth in their region. The link between fi nancial quality and growth is valid both in the pre-crisis and post-crisis period. These results provide evidence to the importance of swiftly restoring bank pro tability in euro area crisis countries through addressing high non-performing loans ratios and decisive actions on bank recapitalization. JEL Classification: G21, O16, O47, O52