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

  • Bossone, Biagio
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    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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    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
    Date of revision:
    Handle: RePEc:wbk:wbrwps:2408
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    1. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    2. Bruce D. Smith & Warren E. Weber, 1999. "Private money creation and the Suffolk Banking System," Proceedings, Federal Reserve Bank of Cleveland, pages 624-667.
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    4. E. Gerald Corrigan, 1982. "Are banks special?," Annual Report, Federal Reserve Bank of Minneapolis.
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    6. Marvin Goodfriend, 1991. "Money, credit, banking, and payments system policy," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 7-23.
    7. Williamson, S.D., 1998. "Private Money," Working Papers 98-09, University of Iowa, Department of Economics.
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    20. Thakor, Anjan V., 1996. "The design of financial systems: An overview," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 917-948, June.
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