英语论文网

istinguish between bad projects and good ones, and accordingly naturally prefer to invest in projects with higher marginal capital productivity, and finally, financial intermediaries consolidate savings level. The banking system facilitates the financing of productive investments by decreasing the quantity liquid funds held by householders, and investing these funds into illiquid projects with high productivity performance that promote economic growth. Levine and King (1993) argued that the variability of intermediation margins automatically influence the growth rate of aggregate output. Galetovic (1996) argued that financial innovation fosters efficiency and reduces default risk through efficient monitoring and screening of investment projects. According to Greenwood and Javanovic’s (1990) long run growth model, there is a “dual direction of causality over a time horizon” between economic growth and financial systems development.

In early stages of economic development, economic growth supports the expansion of financial institutions whereas, afterwards, a consolidated and mature financial system promotes more efficient investment allocations and, therefore, triggers faster economic growth. According to Robinson (1952) economic growth naturally generates demand for financial instruments and innovation. This body of research explored above provides sufficient compelling evidences and solid grounds for a relative consensus that financial deepening promotes real economic growth.

Figure 4: Finance and Growth, source Levine, R., (2005)

THE FINANCIAL SYSTEM AND MACROECONOMIC STABILITY

The recent economic troubles in the world economies are often connected with financial sector disturbances. The relationship between economic slowdowns and troubled banking systems therefore needs to be emphasized. More recently the macroeconomic slowdown has been the consequence of the financial crisis 08. Therefore, the key question to answer is whether there is a relationship between macroeconomic performance and financial stability.

The banking sector is (usually) one of the most heavily regulated industries in an economy. There are two main reasons of why high attention is being paid to the banking sector. Firstly, the banking system is the heart of market economy and is extremely interconnected with all other parts of the economic system. Its purpose is to allocate funds efficiently from people who do not need it temporarily to people who are ready to invest in profitable projects.

In addition, banks play a vital role in the monetary policy execution process and the smooth operation of payments and settlement systems. It is therefore rational that disturbances in the banking industry are likely to impact other industries of the economy. During the past financial crises, the explosion of contagion risks significantly aggravated problems in the banking sector, and resulted in catastrophic and extremely deteriorating economic consequences on a global scale; this is known as systemic banking risk.

Over the years the financial system has undergone significant metamorphoses. Financial innovations significantly developed and promoted globalization in the financial system. For example, over the past decades, complex financial innovations such as securitization and credit transfer structured derivative products such as credit default swaps resulted in stronger