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The banking and production economies. Influence and regulation

12nd National Competition for Economic Research Grants

Industrial economics and regulation

Senior Researcher : David Martínez Miera

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Research Centre or Institution : Universidad Carlos III de Madrid.


The recent financial crisis has highlighted the need to understand the interrelation between the banking economy and the production economy. Traditionally, the analysis of banking regulation and the way this feeds back into the production structure has not formed part of the core of analyses in banking literature. The aim of this research project is to analyse, from both the theoretical and empirical points of view, the existing interrelations between the structure of the production economy, with particular emphasis on small and medium-sized businesses, and the structure and regulation of the banking economy.

The analysis of the interrelation between the two markets and how the imperfections existing in those markets reinforce each other is key for the design of efficient regulatory policies, both those aimed at the industrial market and those aimed at the financial market. This study will, among other objectives, make it possible to design policies to increase access to funding by small and medium-sized enterprises, without endangering the stability of the financial system. It will also permit the design of financial stability policies that do not excessively affect credit with the consequent reduction in the country's productive capacity.

Our work plan will form part of a trend of recent studies, predominantly theoretical ones, which analyse the effects of banking regulation on the stability of the financial system, recognising that the profitability and risk of credits are determined endogenously by decisions taken by debtors. This is important, because debtors take their production decisions taking into account both the conditions of their competitors and the conditions in the banking market. The heterogeneity in the size and geographical extension of banks deriving, for example, from banking restructurings may be key when it comes to determining the technologies that the banks use to evaluate credits (use of formal or informal information), and this affects the type of companies to which credit is granted.

From a more empirical point of view, our aim is to identify the differential effects which banking regulation policies (both those which directly affect the level of competition among banks, and those which determine the price and the quantity of available funds for the industry) can have on different sub-groups of debtors, and thus influence the structure of the markets of products. This new approach has important consequences for the study of the effect which a lack of banking competition can have on industrial development, the adoption of innovative technologies, competitive dynamics and entrepreneurship. The second part of this empirical analysis will focus on determining how the production structure (more specifically competition in the production market) can in turn affect the structure of banking competition, thus acknowledging the endogenous nature and relevance of the relation between the banking economy and the production economy.

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