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date: 23 January 2021

Abstract and Keywords

This chapter reviews insights about how the banking system affects real economic performance. After arguing that the causality debate—the high-level question of whether the characteristics of a banking system have causal consequences for the real economy—has essentially been settled, we evaluate the specific channels through which banking activity may exert real effects. We focus on the rich empirical literature spawned by the theoretically ambiguous impact of greater banking competition, which has found concentration of the banking system to be a significant determinant of the structure and health of non-financial industries. We also discuss how, after the 2007–9 financial crisis, there has been revitalized interest in modeling the role that financial intermediaries play in amplifying aggregate shocks and initiating crises. We conclude by noting the importance of accounting for the changing institutional, structural, and technological properties of the financial sector in understanding the interplay between financial and real activity.

Keywords: competition, economic growth, financial intermediation, financial stability, general equilibrium models, market structure

Nicola Cetorelli

Nicola Cetorelli is a Vice President at the Federal Reserve Bank of New York and the Head of the Financial Intermediation Function in its Research Group. His research has focused on the industrial organization and the corporate finance characteristics of the banking industry and the relationships with real economic activity. More recently he has worked on themes of international banking and on the evolution of financial intermediation. He represents the New York Fed on various Financial Stability Boards’ international working groups. He has published in a number of scholarly journals, among which the Journal of Finance, Journal of Economic Theory, American Economic Review, and Journal of International Economics. He has also written many articles in various policy journals and book chapters. He received his Ph.D in Economics from Brown University and a B.A. from the University of Rome, Italy.

Michael Blank

Michael Blank is a Ph.D candidate in Business Economics at Harvard Business School. Previously, he served as a senior research analyst at the Federal Reserve Bank of New York.

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