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The second European banking directive of 1989 allows national banking markets to become more concentrated over the last decennia and allows banks to do more than just lending. These conditions form the perfect basis to investigate the effect of bank characteristics on firms' external financing and growth. Additionally, we assess the impact of the current financial crisis. The aim of the first two chapters is to examine the relationship between more concentrated banking markets and external finance behavior of firms. The first paper examines firm capital structure. Results show that more concentrated banking markets are associated with less external capital which suggest that banks use their market power. In the second paper we investigate loan characteristics such as size, maturity and spread of syndicated loans. In the syndicated loan market, more concentrated banking markets lead to lower loan spreads. However, during the financial crisis we find that more concentrated banking markets cause an increase in loan spreads which aggravates the effect of the financial crisis. In the third chapter, we examine the relationship between banks as shareholder and the performance of firms in which banks own shares. Banks are expected to be more able to control management, because they can lend to firms as well as being a shareholder. Nevertheless, we find bank ownership to reduce firm value. This result contrasts sharply with the hypothesis that banks are good monitors. It suggests that banks should focus on their core activities. Finally, we investigate the impact of bank regulation on the liquidity provisioning of banks to firms. Liquidity provisioning is one of the primary reasons for banks to exist. Moreover, the banking sector is one of the most regulated industries in the world, where bank capital plays a prominent role. Our results show that stronger supervision of bank capital results in lower liquidity provisioning. Yet, during the financial crisis stronger supervision of bank capital stimulates liquidity provisioning.

We investigate whether or not banks play a positive role in the ownership structure of European listed firms. We distinguish between banks and other institutional investors as shareholders and examine empirically the relationship between financial institution ownership and the performance of the firms in which they hold equity. Our main finding is that after controlling for the capital structure decision of the firms and the ownership decision of financial institutions in a simultaneous equations model, we find that there is a negative relationship between financial institution ownership and the market value of firms, measured as the Tobin's Q. This is in contradiction with the monitoring hypothesis.

We explore the impact of concentration in the banking markets on the capital structure of publicly quoted non-financial firms in the EU15 over the period 1997- 2005, an era marked by intensive merger activity in the banking sector. Our main finding is a negative and significant relationship between the degree of concentration of European bank markets and the market leverage of firms, indicating the persistence of credit constraints. This finding is robust when we use behavioral measures of bank conduct. This support for the market power hypothesis indicates that further measures are needed to make bank lending more competitive.