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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
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    Handle: RePEc:wbk:wbrwps:2408
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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. Bruce D. Smith & Warren E. Weber, 1998. "Private money creation and the Suffolk Banking System," Working Papers 591, Federal Reserve Bank of Minneapolis.
    3. James Tobin, 1963. "Commercial Banks as Creators of 'Money'," Cowles Foundation Discussion Papers 159, Cowles Foundation for Research in Economics, Yale University.
    4. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    5. E. Gerald Corrigan, 1982. "Are banks special?," Annual Report, Federal Reserve Bank of Minneapolis.
    6. Thakor, Anjan V., 1996. "The design of financial systems: An overview," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 917-948, June.
    7. Cheng Wang & Stephen D. Williamson, 1998. "Debt Contracts with Financial Intermediation with Costly Screening," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 573-595, August.
    8. Kareken, John H., 1985. "Ensuring financial stability," Proceedings, Federal Reserve Bank of San Francisco, issue June, pages 53-86.
    9. 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.
    10. Arestis, Philip & Howells, Peter, 1999. "The Supply of Credit Money and the Demand for Deposits: A Reply," Cambridge Journal of Economics, Oxford University Press, vol. 23(1), pages 115-19, January.
    11. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
    12. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    13. Allen, Franklin & Santomero, Anthony M., 2001. "What do financial intermediaries do?," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 271-294, February.
    14. Stephen D. Williamson, 1999. "Private money," Proceedings, Federal Reserve Bank of Cleveland, pages 469-499.
    15. Marvin Goodfriend, 1991. "Money, credit, banking, and payments system policy," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 7-23.
    16. repec:fth:wobaco:1083 is not listed on IDEAS
    17. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
    18. Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Markets, Corporate Finance, and Economic Growth: An Overview," World Bank Economic Review, World Bank Group, vol. 10(2), pages 223-39, May.
    19. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
    20. Neil Wallace, 1996. "Narrow banking meets the Diamond-Dybvig model," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
    21. Hicks, John, 1989. "A Market Theory of Money," OUP Catalogue, Oxford University Press, number 9780198287247, March.
    22. Wang, Cheng & Williamson, Steve, 1998. "Debt Contracts and Financial Intermediation with Costly Screening," Staff General Research Papers 5086, Iowa State University, Department of Economics.
    23. James McAndrews, 1997. "Banking and payment system stability in an electronic money world," Working Papers 97-9, Federal Reserve Bank of Philadelphia.
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