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Effects of Financial System Size and Structure on the Real Economy
What do we know and what do we not know?

Working Paper

Authors: Ulrich Volz   

Published By: UNEP Inquiry   

Date: Nov 2015

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Effects of Financial System Size and Structure on the Real Economy

This paper provides an overview of the findings in the empirical economics and finance literature on the effects that various financial system characteristics have on real economic outcomes. Although the empirical evidence on various relationships is mixed, there appears to be relatively robust empirical evidence that: financial deepening promotes economic development only up to a certain size of financial systems relative to GDP and that ‘too much finance’ may actually harm economies; that smaller banks tend to have more stable lender-borrower relationships than large banks and that smaller banking institutions extend more credit to SMEs; that market-based banking provides less financing to the real economy than traditional banking while being more prone to financial crisis; and that more concentrated banking markets are less cost efficient.

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