Too Much Finance?

This paper examines whether there is a threshold above which financial development no longer has a positive on economic growth. We use different empirical approaches to show that there can indeed be too much finance. In particular, our results suggest that finance starts having a negative on output growth when credit to the private sector reaches 100% of GDP. We show that our results are consistent with the vanishing effect of financial development and that they are not driven by output volatility, banking crises, low institutional quality, or by differences in bank regulation and supervision.