Regional banks and industrial employment – findings from a comparison of European countries

In light of geopolitical conflicts, the production of physical goods is seen as necessary to ensure resilient economies. However, understanding the factors supporting manufacturing remains limited. The three-sector model falls short in explaining large industrial sectors in high-income countries. Germany is a high-income country with significant secondary sector employment and features a geographically decentralized banking system. A coincidence? This study conceptualizes the relationship between the geographical structure of banking systems and industrial production and empirically tests this relationship. Analysing 26 European countries for the period 2008–2021, we detect a U-shape relationship between the geographical centralization of bank headquarters and the share of industrial employment, negative for Western Europe and positive for Central and Eastern Europe. This finding suggests that at higher levels of economic development, geographical centralization in banking becomes a drag for industrial activity, thus threatening economic resilience. Alarming result, given the decline of regional banks in most European economies.