Effects of the GRW programme on local credit markets in Germany

Mr Koetter, the main findings of the study on the GRW programme are that local credit markets are strengthened, there is no crowding-out effect on non-subsidised companies and there are regional differences in the effect. Does this mean that the state subsidies in the case of eastern Germany have obviously led to a positive effect and must be seen as a positive example of a subsidy?

Michael Koetter: The effect of the GRW subsidies on the local credit markets is indeed positive. Banks that have worked with GRW-subsidised companies over the last 20 years are lending more and this does not appear to be at the expense of non-subsidised companies. It is interesting to note that this credit multiplier is statistically verifiable in the new federal states in particular. However, this is not so much a positive example of a subsidy policy, but rather an indication that financial intermediaries in their function as experts in the selection and evaluation of investment projects appear to be an important component of a successful subsidy policy. 

In your view, did it make sense overall to implement the subsidies? Or would there have been alternative approaches that might have been more efficient or sustainable?

Michael Koetter: It is important to realise that our studies cannot say anything about the effects of GRW subsidies on the performance of companies or quantify general welfare effects. Rather, the main focus was on the question of whether the institutional involvement of banks in the GRW subsidy allocation process possibly crowds out lending to non-subsidised companies. This is not the case. Rather, our results show that the subsidisation of selected projects with the early involvement of banks promotes local lending overall. Whether this goal could have been achieved better by alternative subsidisation measures remains an open question. However, our findings suggest that a subsidisation policy that involves banks or other financial market players in the evaluation of subsidised investment projects at an early stage is beneficial.   

Were there any indications that companies in western Germany or non-subsidised companies in eastern Germany were disadvantaged by the subsidies in the east? For example, by shifting resources or investments?

Michael Koetter: We can say with a high degree of certainty that, at least in eastern Germany, the additional lending to companies as a result of GRW subsidisation was not at the expense of non-subsidised companies. Whether there was also an intra-German reallocation of loans on the banking side would be an interesting study for the future.

Mr Koetter, are there any findings on whether the subsidies tempted banks to accept more risks?

It is conceivable that some loans were granted to subsidised companies that would not have been granted without state aid. Higher lending due to GRW subsidies could therefore lead to a higher risk appetite among some banks. Our findings show that such undesirable side effects of this policy measure do not apply. Neither the proportion of non-performing loans nor the probability of default of those banks that hold a relatively large number of GRW-subsidised companies in their customer portfolio increases. 

Have there been funding programmes similar to the GRW in other countries, and what experiences have been made with this instrument there?

Michael Koetter: Yes, the EBRD Transition Report sheds light on a large number of similar, so-called place-based programmes in selected countries. At the IWH, Mirko Tietze's team at the Centre for Evidence-based Policy Advice (IWH-CEP) is investigating the real economic effects of such subsidy programmes, which are mixed internationally. One realisation from my perspective as a financial economist, however, is that it appears to be fundamentally beneficial if independent experts from the financial sector are involved in the evaluation of potential subsidy projects at an early stage in order to reduce inherent information asymmetries. In addition, the institutionalised involvement of financial market players supplements possible political objectives with an assessment that is as neutral and return-oriented as possible.

In 2024, there were fewer than 20,000 bank branches in Germany for the first time, around 945 fewer branches than a year ago. There is talk of banks dying out. How does this fit in with the statement of stronger local credit values?

Michael Koetter: Despite this decline, Germany remains a country with more bank branches per inhabitant than almost any other European partner. In addition, typical financial services for consumers in particular, such as the processing of payment transactions, but also increasingly savings and investment products, are primarily sold digitally. So I think that the local expertise of local banks has little to do with branches made of bricks and glass. Rather, modern sales structures are needed in order to be able to maintain locally rooted relationships with local banks more efficiently.

The interview was conducted by Wolfgang Sender. 

• About the study: Aleksandr Kazakov, Michael Koetter, Mirko Titze, Lena Tonzer: Firm Subsidies, Financial Intermediation, and Bank Risk
• To the Transition Report 2024-25 of EBRD