Banking competition and economic growth

Although it is recognized that competition is the most efficient and desirable market structure, banking markets represent an example of a sector where a competitive environment may even be harmful because, without an adequate degree of market power, banks cannot get enough information about borrowers and are less willing to engage in lending relationships with their clientele. In turn, these phenomena may have an adverse impact on their lending activity and hence on the overall economic performance. Both theoretical and empirical economic literature have not reached a clear-cut consensus on the way banks contribute to economic growth in either a more competitive or a more concentrated environment. In this chapter the author surveys the existing literature on the connection between competition in banking markets and real economic activity, and provides some new empirical evidence on the issue.