Bank structure, capital accumulation and growth: a simple macroeconomic model

This paper analyzes the equilibrium growth paths of two economies that are identical in all respects, except for the organization of their financial systems: in particular, one has a competitive banking system and the other has a monopolistic banking system. In addition, the sources of inefficiencies, as a result of monopoly banking, and their relationship to the existence of credit rationing are explored. Monopoly in banking tends to depress the equilibrium law of motion for the capital stock for either of two reasons. When credit rationing exists, monopoly banks ration credit more heavily than competitive banks. When credit is not rationed, the existence of monopoly banking leads to excessive monitoring of credit financed investment. Both of these have adverse consequences for capital accumulation. In addition, monopoly banking is more likely to lead to credit rationing than is competitive banking. Finally, the scope for development trap phenomena to arise is considered under both a competitive and a monopolistic banking system.