IMF Paper Finds That Too Much Finance is Bad for Growth

The recent IMF paper, Rethinking Financial Deepening: Stability and Growth in Emerging Markets, is focused on the impact of financial development on growth in emerging markets, but its authors clearly viewed the findings as germane to advanced economies. Their conclusion was that the growth benefits of financial deepening were positive only up to a certain point, and after that point, increased depth became a drag. But what is most surprising about the IMF paper is that the growth benefit of more complex and extensive banking systems topped out at a comparatively low level of size and sophistication.