Good Banks and Bad Banks, Centralised Banks and Local Banks and Economic Growth

Abstract

The on-going banking crisis has demonstrated the significance of banking for economic growth. While banks as creators of money are important for the functioning of the economy, bank lending to productive enterprises is necessary for economic activity. Much of the international policy discussion supports the notion of reform of banking structure to allow banks to perform these two functions more effectively. On the one hand there is a discussion of separating traditional banking functions from those which exposed the system to excessive risk, i.e. separating ‘good' banking from ‘bad' banking. At the same time there has been discussion of the relative merits of large-scale banking concentrated in financial centres and smaller-scale local banking.