Developing economies often lack sophisticated equity markets, meaning that firms that are focused on innovation must rely on bank lending. But tight bank policies can undermine the culture of innovation that is essential to growth.

Research conducted for the Asian Development Bank Institute concludes that deregulation creates a dynamic banking sector that, depending on the development stage, can either aid or hinder innovation.

The gradual deregulation of US banks over 20 years since 1970 is particularly instructive. During this period, some US banks responded to deregulation by making credit more available to out-of-state firms. Others consolidated locally by opening new regional branches.

Comparing the two patterns shows how extending credit markets aided innovation, while regional expansion generally hindered it.

Read the transcript

https://bit.ly/2lAx1Uw

Read the report

https://www.adb.org/publications/banking-and-innovation-review

About the authors

Chen Lin is a professor at the University of Hong Kong.

Sibo Liu is a PhD candidate at the University of Hong Kong.

Lai Wei is an assistant professor at Lingnan University, Hong Kong, China.

Know more about ADBI’s work on banking

https://bit.ly/2K8n5AH

https://bit.ly/2K8ncfB