UBS Center Newsletter July 2018

13 Ideally, the financial sector should channel funds towards the most productive firms. By screening and monitoring borrowers, banks are supposed to efficiently allocate capital across firms. In my dis- sertation, I show that banks are increasingly failing at this task. Instead, they provide more and more credit to unproductive firms and undermine eco- nomic growth. Following the introduction of new technologies and a wave of financial deregulation, banks expanded across the US on an unprecedented scale operating in only two branches in 1980, but sixteen in 2015. I show that expansion comes at a cost. When enter- ing new markets, banks have no knowledge about the quality of new borrowers – they face asymmet- ric information. To overcome this friction, banks rely on secured lending: new borrowers must pledge collateral. As bank expansion exacerbates the problem of asymmetric information, it leads to an increase in credit supply for collateral-owning firms. Unfortunately, borrowers with collateral are often slow-growing firms with low investment rates and productivity. Bank expansion thus improves bor- rowing conditions for exactly the wrong type of firms. An ever-increasing share of resources is funneled towards inefficient firms, as it is no longer the most dynamic firms that receive credit, but firms that own collateral. I show that this realloca- tion of credit towards unproductive firms depresses aggregate productivity growth. Cities with more bank entry and, consequently, a stronger increase in secured lending see a decline in growth rates of productivity and GDP per capita. My work ad- dresses the causes and consequences of secular stagnation and offers an explanation for the slow growth over the last two decades. What comes next? I collected most of the data and have most of my main results, which I am currently reflecting in a first draft. Over the next couple of weeks, I will gather additional evidence on the underlying mech- anism and present the project at various confer- ences. Does finance cripple growth? Bank expansion, capital allocation, and growth SCHOLARSHIPS Senior scholarship holder Sebastian Dörr. How does the introduc- tion of new technologies and the wave of financial deregulation affect the financial sector? Sebastian Dörr