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What makes banks special ? a study of banking, finance, and economic development

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  • Bossone, Biagio
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    Abstract

    Over the past decades, finance theory has contributed significantly to understanding banks and identifying what qualifies them to be special financial intermediaries. Historically, banks have had a comparative advantage in certain functions - such as providing liquidity and payment services and supplying credit and information - which competition, technological change, and institutional development have increasingly eroded. And the spread of e-money could deal a blow to conventional banking, generating entirely new ways of doing finance. After integrating his examination of money, production, and investment, the author argues that banks remain special in that they lend claims on their own debt and the public accepts the debt claims as money. His study shows the banks and nonbank financial intermediaries perform complementary functions essential to the economy. Risk reduction policies in payment systems, banking asset allocation, and the deposit market affect the economy's tradeoff between risk and efficiency and the cost of generating resources to finance production. As possibilities for global communications expand, trust will matter more than ever, and banks and other financial intermediaries will be in a good position to bridge gaps in trust when it comes to creating money and intermediating funds.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2408.

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    Date of creation: 31 Aug 2000
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    Handle: RePEc:wbk:wbrwps:2408

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    Keywords: Decentralization; Payment Systems&Infrastructure; Banks&Banking Reform; Economic Theory&Research; Financial Intermediation; Financial Intermediation; Banks&Banking Reform; Economic Theory&Research; Financial Crisis Management&Restructuring; Environmental Economics&Policies;

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    1. Joseph P. Hughes & Loretta J. Mester, 1997. "Bank capitalization and cost: evidence of scale economies in risk management and signaling," Working Papers 96-2, Federal Reserve Bank of Philadelphia.
    2. Neil Wallace, 1996. "Narrow banking meets the Diamond-Dybvig model," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
    3. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
    4. Marvin Goodfriend, 1989. "Money, credit, banking and payments system policy," Working Paper, Federal Reserve Bank of Richmond 89-03, Federal Reserve Bank of Richmond.
    5. Bruce D. Smith & Warren E. Weber, 1999. "Private money creation and the Suffolk Banking System," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 624-667.
    6. Williamson, Stephen D, 1999. "Private Money," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 31(3), pages 469-91, August.
    7. Douglas W. Diamond & Raghuram G. Rajan, 1999. "Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking," NBER Working Papers 7430, National Bureau of Economic Research, Inc.
    8. Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Markets, Corporate Finance, and Economic Growth: An Overview," World Bank Economic Review, World Bank Group, World Bank Group, vol. 10(2), pages 223-39, May.
    9. Allen, Franklin & Santomero, Anthony M., 2001. "What do financial intermediaries do?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(2), pages 271-294, February.
    10. repec:fth:wobaco:1083 is not listed on IDEAS
    11. James Tobin, 1963. "Commercial Banks as Creators of 'Money'," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 159, Cowles Foundation for Research in Economics, Yale University.
    12. Wang, Cheng & Williamson, Steve, 1998. "Debt Contracts and Financial Intermediation with Costly Screening," Staff General Research Papers 5086, Iowa State University, Department of Economics.
    13. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 3(1), pages 2-50, October.
    14. James McAndrews, 1997. "Banking and payment system stability in an electronic money world," Working Papers 97-9, Federal Reserve Bank of Philadelphia.
    15. E. Gerald Corrigan, 1982. "Are banks special?," Annual Report, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis.
    16. Thakor, Anjan V., 1996. "The design of financial systems: An overview," Journal of Banking & Finance, Elsevier, Elsevier, vol. 20(5), pages 917-948, June.
    17. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(4), pages 647-63, October.
    18. Hicks, John, 1989. "A Market Theory of Money," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198287247, October.
    19. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    20. Cheng Wang & Stephen D. Williamson, 1998. "Debt Contracts with Financial Intermediation with Costly Screening," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 31(3), pages 573-595, August.
    21. Arestis, Philip & Howells, Peter, 1999. "The Supply of Credit Money and the Demand for Deposits: A Reply," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 23(1), pages 115-19, January.
    22. Kareken, John H., 1985. "Ensuring financial stability," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue June, pages 53-86.
    23. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
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