Banking Crises, Firms and their International Affiliates in the EU. Bertelsmann Stiftung Policy Paper September 2019

Huber, Kilian and Ponattu, Dominic (2019) Banking Crises, Firms and their International Affiliates in the EU. Bertelsmann Stiftung Policy Paper September 2019. [Policy Paper]

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Abstract

This study analyzes how banking crises affect European economies. First, we show that European firms grow more slowly if they have relationships to crisis banks in their home country. Second, we argue that the international affiliates of multinational corporations grow more slowly when their parent firm is hit by a banking crisis in its home country. This suggests that the internal networks of multinational firms can transmit banking crises across European countries. The effects could be sizable: for example, back-of-the envelope calculations suggest that a banking crisis in the US could lead to an estimated decrease in sales in the German business economy of about 21 billion euros each year, while a banking crisis in the UK could induce a sales loss of about 13 billion euros in the German business economy. The results suggest that measures to prevent banking crises, for example reductions in political risks (like Brexit) or Eurozone reforms (averting the "diabolical loop"), would significantly reduce cross-country contagion of crises via firms – and this way contribute to a smooth functioning of the real economy in the Single Market.

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