In this paper we revisit the question whether negative shocks to banks have adverse real
economic effects. We analyze German savings banks and propose a new identification
strategy. We consider distressed mergers and interpret them as exogenous shocks to the
(initially non-distressed) acquiring bank. We find that in the years after a distressed
merger (i) the performance of acquiring savings banks deteriorates; (ii) the shock is
transmitted to firms in the acquirer’s region who cut back their investments and (iii)
the overall macroeconomic dynamics in the region of the acquirer deteriorates, leading
to lower investment and employment growth. To justify a causal interpretation of our
results we perform several additional tests that establish the exogeneity of the shock
to the acquiring bank with respect to local economic dynamics.
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