Bank Deregulation and Bank Solvency: A Macro View

Chandana Das and Ambar Ghosh
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Chandana Das: Economic Research Unit, Indian Statistical Institute, Kolkata, India
Ambar Ghosh: Economics Department, Jadavpur University, Kolkata, India

Indian Economic Review, 2007, vol. 42, issue 1, 19-40

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.

Keywords: Financial Sector; Directed Credit; Liberalization; Externality; Bank-Profit (search for similar items in EconPapers)
JEL-codes: E12 E58 G21 (search for similar items in EconPapers)
Date: 2007
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