The Banking Firm, Competition and Growth: Overview of the Literature

The existence of a finance-growth nexus has drawn the attention of many economists, from Schumpeter to our days. Up to the seventies, there was no real microeconomic theory of the banking firm. The work of Klein (1971) opened the way for a vast literature on the microeconomics of the banking industry. In formal macroeconomic theory, however, for most of the past decades, the financial sector was greatly ignored. In the presence of perfect markets, as in the traditional Arrow-Debreu model of resource allocation, the financial sector would play no significant role. Developments in the study of the microeconomics of banking, building on the new industrial organization approach and/or on the imperfect information paradigm, have slowly been introduced in macroeconomic theory. Developments in growth theory have also brought new insight into the finance-growth nexus. Recent empirical studies, such as Shaffer (1993), Molyneux et al (1996), Bikker and Groenweld (2000), De Bandt and Davis (2000) and Corvoisier and Gropp (2002), have shown that the banking sector in many countries is characterized by imperfect competition, especially in the case of European countries. In the present study, which does not intend to be extensive, we will pay a particular attention to competition in the banking sector and its relevance to the relationship between finance and economic growth.