Global Finance and Economics

The microeconomics of banking

During the last three decades, the economic theory of banking has entered a process of change that has overturned economists’ traditional view of the banking sector. Before that, the banking courses of most doctoral programs in economics, business, or finance focused either on management aspects (with a special emphasis on risk) or on monetary aspects and their macroeconomic consequences. Thirty years ago, there was no such thing as a microeconomic theory of banking, for the simple reason that the Arrow-Debreu general equilibrium model (the standard reference for microeconomics at that time) was unable to explain the role of banks in the economy.