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9 - Banking on Prosperity

from Part V - Special Topics on Economic Growth

Published online by Cambridge University Press:  21 October 2021

By
Ross Levine
Edited by
John W. Diamond  and
George R. Zodrow
John W. Diamond
Affiliation:
Rice University, Houston
George R. Zodrow
Affiliation:
Rice University, Houston
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Summary

Banks provide vital services to the economy: mobilizing, allocating, and monitoring the use of savings, by firms and individuals; providing mechanisms for pooling and managing risks; and facilitating trade in goods, services, and securities. When banking systems perform well, for example by improving the allocation of resources, they accelerate long-run economic growth. Furthermore, better-functioning banks disproportionately help lower-income families by funneling capital to the most promising entrepreneurs, rather than to those from the most connected families. By improving the efficiency of capital allocation, better-functioning banks create a more competitive environment in which workers face more dynamic labor markets, thus enhancing the economic opportunities available to people who may never receive a loan or start a business. Recent research also finds that regulatory reforms that spur competition among banks not only improve the economy; they also lower crime, ease financing constraints, increase schooling, shrink racial wage gaps, and help alleviate mental depression. This suggests important connections between finance and prosperity.

Keywords

banking systemeconomic prosperitysocial welfarerisk managementallocation of resourcesprivate credit
Type
Chapter
Information
Prospects for Economic Growth in the United States , pp. 247 - 262
Publisher: Cambridge University Press
Print publication year: 2021

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