Finance and Growth in a Bank-Based Economy : Is it Quantity or Quality that Matters?

With this paper we seek to contribute to the literature on the relation between finance and growth. We argue that most studies in the field fail to measure the quality of financial intermediation but rather resort to using proxies on the size of financial systems. Moreover, cross-country comparisons may suffer from the disadvantage that systematic differences between markedly different economies could drive the result that finance matters. Therefore, we suggest an alternative to measure the quality of banks' financial intermediation and focus on the regions of one economy only: Germany. To approximate the quality of financial intermediation we use bank efficiency estimates estimated at the firm-level. We find that the quantity of supplied credit is indeed insignificant when a measure of intermediation quality is included. In turn, the efficiency of intermediation is robust, also after excluding banks likely to operate in multiple regions and distinguishing between different banking pillars active in Germany