Banking scope and financial innovation |
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| Authors: | Boot AWA; Thakor AV |
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| Institution: | University of Amsterdam, The Netherlands
z Corresponding author at: Edward J Frey Professor of Banking and Finance, University of Michigan Business School, 701 Tappan Street, Ann Arbor, MI 48109, USA |
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| Abstract: | We explore the implications of financial system design for financialinnovation. We begin with assumptions about the investment opportunitiesof firms, their observable attributes, and the roles of commercialbanks, investment banks, and the financial market. We examinethe borrower's choice between bank and financial market funding,the commercial bank's choice of monitoring capacity, and theinvestment bank's choice of whether to invest in financial innovation.Our main result is that financial innovation in a universalbanking system is stochastically lower than innovation in afinancial system in which commercial and investment banks arefunctionally separated. |
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