In the wake of the global financial crisis, there is growing consensus that national development banks play a valuable role in development finance. This chapter looks first at the theoretical background justifying the need for development banks. The chapter then describes empirically some of the key features of national development banks, including their lending and funding structure. Finally, it analyses in depth five main functions which national development banks perform: (i) providing countercyclical lending; (ii) promoting innovation and structural transformation; (iii) enhancing financial inclusion; (iv) supporting infrastructure investment; and (v) supporting the provision of public goods, and particularly combatting climate change.

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The New Deal regulatory policies and institutions redesigned the u.s. financial structure and implicitly required the coordination between monetary policy and the regulatory framework; in that financial structure the Federal reserve provided the reserves. The interest policy implicitly required the calibration and coordination of deposit ceiling rates and the prevailing market rate set by the Fed. However, the Treasury-Federal reserve Accord of 1951 effectively dismantled the necessary coordination between monetary policy and the banking regulatory framework. The combination of interest rate differentials and reliance on markets as a liquidity provider triggered the creation of new financial instruments and institutions that changed the structure of the u.s. banking system. This policy encouraged the development of a financial system in which financial institutions seek to escape regulations. For instance, nonbank financial institutions escaped regulations and entered into the banking business model, getting both market share and profits of the regulated banking system. The New Deal constraints combined with innovation and competition between regulated and unregulated banks encouraged the emergence of shadow banks, as the latter were not subject to constraints.