Banks are defined by Gertler and Karadi (2011) as commercial institutions which act as financial intermediaries in the financial market. Imperfect capital markets where transaction costs and asymmetric information exist are the reasons for the existence of banks, as stated by Scholtens and van Wensveen (2000). According to Allen and Santomero (2001) their aim is reallocating the resources of economic units with surplus funds, when they have more money than they need to spend, to economic deficit units, when they need to spend more money than they have. To do this, they must be in possession of a banking license, as explained by Ajwain (2010). As highlighted by Kashyap et al. (2017) they are using both sides of their balance sheet in doing so. In fact, they are taking deposits from savers and making loans to borrowers. Kashyap et al. (2002) argued that this kind of business is subject to three tasks of transformation. The first transformation is maturity. Typical bank loans given are medium or long-term, while received deposits are usually payable on demand. Secondly, there is risk transformation regarding the capability of intermediaries to diversify risks such as default risks of bank loans or interest risks of bonds bought by the bank. The third task of transformation refers to size issues. Banks pool small savings of savers to make large loans to borrowers. Banks are, as outlined by Sikdar and Kumdar (2017), also providing payment services to their customers. In doing their business, banks concentrate on the mass market with focus on individuals and smaller businesses, as described by Ashton (2002). Byers and Lederer (2001) call these kinds of banks inside the whole banking industry retail banks.
Table of Contents
1. Introduction
2. Theoretical foundations of banking
2.1 Financial intermediation and transaction costs
2.2 Information asymmetry and agency problems
2.3 Risk management and liquidity transformation
3. Impact of technological change
3.1 Digital transformation in financial markets
3.2 Cryptocurrencies and the future of banking
4. Conclusion
Objectives and Research Themes
The primary objective of this assignment is to investigate the necessity of banks within the modern financial system by analyzing their core functions and the impact of evolving technological environments.
- The economic role of financial intermediaries.
- Transaction costs and information asymmetry in financial markets.
- Risk management, liquidity transformation, and the delegation of monitoring.
- The disruptive potential of Fintech and blockchain technologies on traditional banking models.
Excerpt from the Book
Impact of technological change
In recent years, information technology has transformed the financial market, as pointed out by Lin (2015). New technology has expanded old markets and opened new markets of finance. The author further states that the core objectives of banks have remained the same, but the methods and functionaries relating to those objectives have been changed by new technology. Byers and Lederer (2001) highlight that it will be increasingly important for banks to adopt new technology. In my opinion, banks must be technological pioneers; otherwise, they will lose in competition against new market entrances. Alt and Puschmann (2012) describe those kinds of new competitors as Fintechs, which is an artificial word of a symbiosis of the words finance and technology. These companies are start-ups in the finance industry, providing financial services in a customer-friendly and fast way using new technologies. They often trade without a banking license in regulatory grey areas, as explained by the authors.
Summary of Chapters
Introduction: This chapter defines banks as commercial institutions and sets the stage for the discussion on their essential functions in the financial market.
Theoretical foundations of banking: This section explores how banks mitigate transaction costs, solve information asymmetries, and manage risks through intermediation.
Impact of technological change: This chapter examines the disruptive influence of new technologies, Fintech, and cryptocurrencies on traditional banking operations.
Conclusion: This section synthesizes the theoretical approaches to conclude that banks remain an integral part of the financial system despite the dynamic changes in banking practices.
Keywords
Financial Intermediaries, Banks, Transaction Costs, Information Asymmetry, Risk Management, Liquidity Transformation, Fintech, Blockchain, Cryptocurrencies, Bitcoin, Financial Markets, Monetary Policy.
Frequently Asked Questions
What is the central focus of this paper?
The paper examines the fundamental economic necessity of banks, questioning whether a modern financial system can function effectively without them.
What are the primary themes discussed?
The main themes include financial intermediation theory, the role of banks in reducing transaction costs, information asymmetry, and the disruptive impact of digital technologies.
What is the primary research goal?
The goal is to analyze whether the traditional functions of banks remain indispensable in light of emerging financial technologies and market developments.
Which scientific methodology is applied?
The assignment employs a literature-based analysis, synthesizing classical theories of financial intermediation with contemporary research on technological innovation.
What does the main body cover?
The main body covers the economic definition of banks, the challenges posed by imperfect markets, and the transition of banking models in the digital age.
Which keywords define this work?
The work is characterized by terms such as financial intermediation, information asymmetry, transaction costs, Fintech, and financial market stability.
How does the author view the role of Fintech?
The author views Fintech as a competitive force that pushes traditional banks to adopt new technologies or risk losing market relevance.
Can Bitcoin replace traditional banks according to the text?
The text suggests that while Bitcoin introduces new ways to conduct transactions without banks, it is currently in an early stage, and the future role of banks is evolving rather than disappearing.
- Quote paper
- Moritz Meyer (Author), 2018, Can we live without banks?, Munich, GRIN Verlag, https://www.grin.com/document/426432
