Monopoly versus Competition in Banking: Some Implications for Growth and Welfare

We consider how the industrial organization of the financial system affects an economy's macroeconomic performance. In particular, we compare two otherwise identical monetary economies -- one with a competitive and the other with a monopolistic banking system -- along the dimensions of bank liquidity provision, asset allocation, savings behavior, long-run real growth, and depositor welfare. We find that monopoly in banking can potentially be growth promoting. However, the relative performance of the two banking systems depends crucially on the level of nominal interest rate.