Banking market structure, liquidity needs, and industrial growth volatility

•Banking structure affects industrial growth volatility.•Bank concentration magnifies industrial growth volatility generally.•Bank concentration reduces volatility with higher external liquidity needs.•Reduction reflects smoothing in variance of real value added per firm growth.•Results robust to banking market structure and liquidity needs indicators.

While the existing literature acknowledges the effect of banking structure on industrial growth as well as the effect of financial development on industrial growth and its volatility, we examine whether banking structure, given financial development, exerts any nontrivial effect on industrial growth volatility. We show that bank concentration magnifies industrial growth volatility, but reduces the volatility in sectors with higher external liquidity needs. The reduction in industrial growth volatility mostly reflects the smoothing in the volatility of real value added per firm growth. A variety of sensitivity checks show that our findings remain for different model specifications, banking market structure measures, liquidity need indicators, and omitted variables.