Financial dependence and growth during crises: when does bank efficiency really matter?

Many papers have analyzed the relationship between growth and a country's level of financial development using private credit. However, very few have used bank efficiency to gauge the development of the financial sector. The aim of this paper is to analyze the effect of bank efficiency on value added growth of industries that were most dependent on external financing during the financial crisis. Specifically, it uses the data envelopment analysis (DEA) method to measure the efficiency of the banking sector across countries, according to the empirical strategy offered by Rajan and Zingales (1998). Our main result shows that bank efficiency relaxed credit constraints and increased the growth rate for financially dependent industries during the crisis. These findings show the importance of bank efficiency in terms of quality of the financial sector in mitigating the negative effects of financial crises on growth for industries that are most dependent on external finance.