## Banks As Coordinators of Economic Growth

_IMF Working Papers, November 1, 2006_

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## Bibliographic details
- Authors: Kenichi Ueda
- Published: November 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451865240.001

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### Summary
- The paper formally identifies a role of banks: banks competitively internalize production externalities and facilitate economic growth.
- The author formulates a canonical growth model with externalities as a game among consumers, firms, and banks.
- Banks compete for deposits to seek monopoly profits, including profits from internalized externalities.
- Loan contracts specify price and quantity, and through these contracts banks control firms' investments.
- Each bank forms a firm group endogenously and internalizes externalities directly within its firm group and indirectly across firm groups.
- The model yields a unique equilibrium conditional on a requirement that separates competition for sources and uses of funds.
- The paper presents a realistic institution that satisfies this separation condition.

### Model and Mechanism
- Canonical growth model with externalities modeled as a game among:
  - consumers,
  - firms,
  - banks.
- Banks’ strategic behavior:
  - compete for deposits,
  - seek monopoly profits that incorporate externalities,
  - use loan contracts that specify both price and quantity to control firm investment decisions.
- Firm grouping:
  - Each bank endogenously forms a firm group,
  - internalization of production externalities occurs directly within a firm group and indirectly across firm groups.

### Equilibrium and Institutional Condition
- The equilibrium is unique under a condition that separates competition for sources and uses of funds.
- The paper presents a realistic institution that satisfies this condition (institutional details are developed in the paper).

### Policy and Economic Implications
- Banks can play a coordinating role in economic growth by internalizing externalities through competitive behavior and contract design.
- Institutional arrangements that enable separation of competition for sources and uses of funds are central to ensuring the unique equilibrium and the growth-enhancing role of banks.

### Subjects and Keywords (as listed)
- Subjects: Bank deposits, Banking, Competition, Deposit rates, Financial institutions, Financial markets, Financial services, Interbank markets, Loans
- Keywords: bank control, Bank deposits, bank h, Bank-oriented financial system, capital level, Competition, Deposit rates, deviating bank-firm pair, economic growth, equilibrium strategy, Europe, firm group, interbank market, Interbank markets, investment decision, loan market, loan rate, Loans, manufacturing activity, monopolist bank, monopoly bank, profit function, WP

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## Content in this bundle

- **Banks as Coordinators of Economic Growth; Kenichi Ueda; IMF Working Paper 06/264; November 1, 2006**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/banks-as-coordinators-of-economic-growth-20065_