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Bank Deregulation and Bank Solvency: A Macro View

Author

Listed:
  • Chandana Das

    (Economic Research Unit, Indian Statistical Institute, Kolkata, India)

  • Ambar Ghosh

    (Economics Department, Jadavpur University, Kolkata, India)

Abstract

There is more or less a consensus that financial repression or the programme of directed credit leads to low levels of bank-profit and thereby threatens solvency of banks in the long run. Rationale of directed credit lies in the divergence between the patterns of private and social profitability in LDCs. This paper seeks to construct a simple example to show that, if allocation of bank credit conforms to the pattern of social profitability, a part of the additional gain to the society may accrue to the banks as well in the form of additional profit. Hence under certain conditions a programme of directed credit that seeks to maximize social welfare might raise aggregate bank-profit substantially above its free market level. One cannot therefore say a priori that aggregate bank-profit under the programme of directed credit will be necessarily less than its free market equilibrium level. The paper uses a Keynesian macro model for its purpose, but brings the credit market to the fore in the inter-linkage between the real and the monetary sector.

Suggested Citation

  • Chandana Das & Ambar Ghosh, 2007. "Bank Deregulation and Bank Solvency: A Macro View," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 42(1), pages 19-40, July.
    • Handle: RePEc:dse:indecr:v:42:y:2007:i:1:p:19-40
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    More about this item

    Keywords

    Financial Sector; Directed Credit; Liberalization; Externality; Bank-Profit;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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