Mr. Arnoud W.A. Boot, Peter Hoffmann, Mr. Luc Laeven, and Mr. Lev Ratnovski
We study the effects of technological change on financial intermediation, distinguishing between innovations in information (data collection and processing) and communication (relationships and distribution). Both follow historic trends towards an increased use of hard information and less in-person interaction, which are accelerating rapidly. We point to more recent innovations, such as the combination of data abundance and artificial intelligence, and the rise of digital platforms. We argue that in particular the rise of new communication channels can lead to the vertical and horizontal disintegration of the traditional bank business model. Specialized providers of financial services can chip away activities that do not rely on access to balance sheets, while platforms can interject themselves between banks and customers. We discuss limitations to these challenges, and the resulting policy implications.
It takes many years for more efficient electronic payments to be widely used, and the fees that
merchants (consumers) pay for using those services are increasing (decreasing) over time. We
address these puzzles by studying payments system evolution with a dynamic model in a twosided
market setting. We calibrate the model to the U.S. payment card data, and conduct welfare
and policy analysis. Our analysis shows that the market power of electronic payment networks
plays important roles in explaining the slow adoption and asymmetric price changes, and the
welfare impact of regulations may vary significantly through the endogenous R&D channel.
This paper examines innovation, deregulation, and firm dynamics over the life cycle of the
U.S. ATM and debit card industry. In doing so, we construct a dynamic equilibrium model to
study how a major product innovation (introducing the new debit card function) interacted
with banking deregulation drove the industry shakeout. Calibrating the model to a novel
dataset on ATM network entry, exit, size, and product offerings shows that our theory fits the
quantitative pattern of the industry well. The model also allows us to conduct counterfactual
analyses to evaluate the respective roles that innovation and deregulation played in the
International Monetary Fund. External Relations Dept.
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The June 2008 issue tackles the crisis in financial markets in industrial countries from a number of angles. Articles look at the origins of the crisis in the subprime mortgage market in the United States and track its spillover into other markets. Then authors examine what can be done to prevent future crises. Other articles look at bank capital adequacy rules and Basel II, whether emerging markets and industrial economies are decoupling or converging, capital flows to low-income countries, efforts to achieve the MDGs, and currency intervention. Back to Basics looks at over-the-counter (OTC) markets and the People in Economics column profiles Jacques Polak. Picture This is on the digital divide.
In October, Raghuram Rajan took up the reins as Economic Counsellor and Director of the IMF’s Research Department—the first chief economist to come from a developing country and the first to specialize in international finance rather than macroeconomics. Rajan, an Indian national, joins the IMF staff after a distinguished career as an academic and a researcher, most recently as Professor of Finance at the University of Chicago’s Graduate School of Business, where he spent much of the past 12 years. In January 2003, he won the Fisher Black prize for the person under 40 who has contributed the most to the theory and practice of finance. He spoke with Laura Wallace about his new post.