A New Framework for Banking Competition
Protecting the Value of Bank Specialness
Allen N. Berger, University of South Carolina - Darla Moore School of Business
Arnoud W. A. Boot, University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute
Abstract
Our new framework for banking competition addresses important questions about the economic and financial effects of this competition. The new framework is based on bank specialness, and requires that we also broaden the existing bank specialness concept to implement the framework. Our broader bank specialness incorporates both favorable and unfavorable economic/financial consequences, the special roles of liquidity creation and risk transformation that allow others to have greater financial liquidity while bearing less financial risk, and the special methods and features that facilitate efficient performance of the liquidity creation and risk transformation roles. We consider bank specialness supplied by banks and by other providers, focusing on the value provided, not the providers. The new framework and broadened specialness are based primarily on the modern theory of financial intermediation and its empirical applications over the last four decades. We evaluate future competitive threats from FinTech, BigTech, and DeFi digital technology firms (DTFs), and create a “bigger picture” of banking competition with research and policy implications by also drawing on two and a half centuries of general economic thought on competition.
Protecting the Value of Bank Specialness
Allen N. Berger, University of South Carolina - Darla Moore School of Business
Arnoud W. A. Boot, University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute
Abstract
Our new framework for banking competition addresses important questions about the economic and financial effects of this competition. The new framework is based on bank specialness, and requires that we also broaden the existing bank specialness concept to implement the framework. Our broader bank specialness incorporates both favorable and unfavorable economic/financial consequences, the special roles of liquidity creation and risk transformation that allow others to have greater financial liquidity while bearing less financial risk, and the special methods and features that facilitate efficient performance of the liquidity creation and risk transformation roles. We consider bank specialness supplied by banks and by other providers, focusing on the value provided, not the providers. The new framework and broadened specialness are based primarily on the modern theory of financial intermediation and its empirical applications over the last four decades. We evaluate future competitive threats from FinTech, BigTech, and DeFi digital technology firms (DTFs), and create a “bigger picture” of banking competition with research and policy implications by also drawing on two and a half centuries of general economic thought on competition.