Imperfect but true competition: innovation and profitability in Portuguese banking during the golden age (1950–1973)

The institutional environment of Portuguese banking during the golden age years of economic growth (1950–73) has been criticised in many instances, at the time and in recent literature. Direct observers of the period as well as historians have stressed two main aspects of that environment: excessive protection of existing banks, allowing them to obtain high rents, which represented a disincentive for them to compete and innovate; excessive concentration of their activity on short-term commercial paper, thus preventing them from contributing to finance growth. There seems to be a contradiction here, however, with the high growth rates of the years 1950 to 1973. The apparent contradiction is not limited to Portugal, in fact, as rapid growth in many economies in that period occurred within a framework of heavily regulated financial systems. This is the ‘financial paradox’ of the golden age. Portugal is an interesting case in the international perspective. As in the rest of the western world, legislation repressed banking quite tightly, but banks circumvented the law and competed with each other. The signs of competition were visible mostly in two dimensions: the growth of time deposits and geographical expansion.