Dr. Franz Flögel

ABSTRACT
According to recent studies, regional banks enhance economic resilience through countercyclical funding. However, these studies focus on the global financial crisis (GFC) and propose vague explanations. Our literature review identifies two mutually non-exclusive explanations as to why regional banks may enhance economic resilience through countercyclical funding. First, the explanation of financial system diversity links the heterogeneity in a financial system with resilience to financial crises. Second, the short-distance explanation links client proximity with better handling of soft information, thereby improving access to finance in any economic turmoil. Regional banks influence both diversity and distance. Our study utilises a novel dataset of bank headquarters’ locations for an exploratory European cross-country comparison to investigate whether geographically decentralised banking systems enhanced economic resilience during the GFC and the COVID-19 pandemic. Our descriptive and ordinary least squares (OLS) regression analyses indicate that regional banks enhanced countries’ economic resilience during the GFC but not during the pandemic or a non-crisis reference period. This finding supports the explanation of financial system diversity. Given the decline in regional banks in most countries since 2008, Europe will be geographically less diverse in future financial crises.

COVID-19 pandemic, regional banks, soft information, economic resilience, financial system diversity, global financial crisis, geographical distance