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The past and future of commercial banking viewed through an incomplete contract lens

  • Raghuram G. Rajan

Commercial banks emerged at a time when contracts were very incomplete and property rights insecure. They typically offered demand deposits, made loans on demand, and were regulated. Each of these aspects of the institutional structure were essential in helping the bank provide the twin functions of liquidity and safety. The author argue that recent theories of banking, which he collectively refer to as 'Incomplete Contract' theories of banking, explain well the origins of banking. The authors also claim that they can explain recent changes in banking; as the informational, legal, and property rights environment has improved, there appear to be fewer synergies between various aspects of the traditional institutional structure of the bank. In developed countries, it is now time to think whether there is anything special about the institutional form of the bank, or whether all that is special is that it is regulated.

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Article provided by Federal Reserve Bank of Cleveland in its journal Proceedings.

Volume (Year): (1998)
Issue (Month): Aug ()
Pages: 524-550

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Handle: RePEc:fip:fedcpr:y:1998:i:aug:p:524-550
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