Banks, systematic risk, and industrial concentration: Theory and evidence

We find evidence in an international cross-section that bank-based financial systems and various measures of vulnerability to real exchange rate fluctuations are highly significant macroeconomic determinants of industrial concentration. We argue that these results can be explained by bank risk-management practices: asymmetric contracts make it impossible for banks to protect themselves against systematic risk (e.g. real exchange rate fluctuations) by diversifying across borrowers; managing the risk requires instead that banks lend to already diversified borrowers, who internalize losses and gains from a shock.