This paper shows that bank competition has an intrinsically ambiguous effect on capital accumulation and economic growth. It further demonstrates that banking market structure can be responsible for the emergence of development traps in economies that would otherwise be characterized by unique steady-state equilibria. These predictions explain the conflicting evidence gathered from recent empirical studies of how bank competition affects the real economy. Cetorelli and Peretto’s results were obtained by developing a dynamic general-equilibrium model of capital accumulation in which banks operate in a Cournot oligopoly. The presence of more banks leads to a higher quantity of credit available to entrepreneurs, but also to diminished incentives to screen loan applicants and thus to poorer capital allocation. The authors also show that conditioning on economic parameters describing the quality of the entrepreneurial population resolves the theoretical ambiguity.