Banks and the real economy: An assessment of the research

Abstract

We review research on the effects of banks on the real economy, including, but not limited to articles in this Special Issue of the Journal of Corporate Finance. We focus primarily on US and European policy interventions that provide quasi-natural experiments with relatively exogenous shocks to bank output. We concentrate on single-country settings, avoiding potentially confounding differences in language, culture, law, currency, and so on, that complicate cross-country investigations. We also largely avoid the effects of financial crises, which are not exogenous to the banking system. The evidence strongly suggests positive effects of banks on the real economy.

Impact of internal and external factors on the net interest margin of banks in Indonesia

“…However, it is understood that the consensus is that high inflation contributes to an increase in NIM, and the impact of real GDP growth remains ambiguous (Carbó & Rodríguez, 2007). Conversely, real GDP growth has a negative impact on bank NIMs based on the fact that (i) creditworthiness of borrowers and net worth decrease during recessions and increase in lending rates (Berger et al, 2020), and (ii) economic growth increases, lowering bank standards (Carbó & Rodríguez, 2007). On the other hand, there is a positive effect of economic growth on NIM due to the fact that loan demand increases during the increase cycle.…”

Bank Size and Household Financial Sentiment: Surprising Evidence from University of Michigan Surveys of Consumers

“…This literature includes but is not limited to studies on bank geographic deregulation (e.g., Jayaratne and Strahan 1996, Morgan, Rime, and Strahan 2004, Huang 2008, Levine, Levkov, and Rubinstein 2008, Beck, Levine, and Levkov 2010, other bank regulation such as capital standards (e.g., Allen 2004), bank bailouts (e.g., Duchin andSosyura 2014, Berger and, and shocks to bank deposits that affect the real economy (e.g., Gilje, Loutskina, and Strahan 2016). See Berger, Molyneux, and Wilson (2020) for a survey of this research. We contribute to this research by showing that bank size structure also influences the real economy by affecting households' sentiment, which is demonstrated elsewhere to affect spending and real economic outcomes.…”

New Approach to Financial and Economic Stability in the United States from a Banking Perspective

“…Berger et al . (2020) suggest that the development of the financial system, of which banks are a key part, stimulates economic growth. However, they argue that beyond a certain level, there may be too much financing for the well‐being of the economy.…”

“…The connection of loans and the real economy is analysed by Barattieri et al . (2020) who measured the way in which a financial institution is connected to the real economy. The measured average consists of the participation of credit to the real sector by the banking sector, from which you can observe how a greater connection increases growth.…”

“…This allows us to observe relationships through a novel methodology with these types of works, which is canonical analysis, from a descriptive and exploratory point of view. Berger et al (2020) highlight the severity of endogeneity problems when analysing the relationship between the banking and economic systems, given that, for example, economic crises are the result of various economic and financial imbalances. In our work, this problem does not occur when a response variable is not established.…”