The Economic Impact of Bank Structure: A Review of Recent Literature

The recent passage of the Financial Services Modernization Act, along with numerous bank mergers over the past few years, has focused attention on the banking sector in general and on the sector's industrial organization in particular. Because of this, economists have recently begun developing theoretical models to more fully understand the economic impact of the industry's market structure. Some of this research is reviewed, and 2 conclusions are drawn. First, a banking monopoly may benefit certain aspects of the economy. In particular, a monopoly bank can help overcome some of the informational problems inherent in the bank-borrower relationship. Second, how completely both the banking system and the economy are modeled is crucial to the results obtained. When ascertaining the overall economic impact, partial equilibrium models find either than monopoly is beneficial or that it is unclear whether it is beneficial or detrimental. In contrast, general equilibrium models find just the opposite: either monopoly is detrimental to the economy or, at best, the impact is ambiguous.