Who needs banks? Or, does finance spur economic growth?
Let me explain the challenge. There is a long debate about the financial sector — banks and financial markets — in economies and its relevance and function. Some advocates argue that a large financial sector is essential since especially banks provide important functions — i.e., the gathering and processing of information — that enable innovation and spur economic growth. Others argue that the financial sector is too large given that innovations come from the side of the firms and financing is only a vehicle to realise new products from these innovations. In light of the last ten years, the questions about the use and the size of financial markets has seen much research since the rescue of the global financial sector and its costs have put may policymakers, regulators, and whole countries under stress and had consequences like the European debt crisis that still troubles policymakers and regulators in Europe.
At the same time, new financial services and products for firms and households like fintechs, smart(phone) banking and cryptocurrencies (with the blockchain technology) have been entering the scene and may pose a challenge to the existing institutions like banks an financial markets. They also may end up on the radar of regulators. Questions that arise here are for example i) do they (these new financial institutions and services) differ from banks in the efficiency to provide financing (and in the effects on economic growth), ii) will they substitute or complement what banks are doing (and do banks may already integrate them), iii) do they need the same treatment in terms of regulation and supervision?
In light of these questions, the challenges are
1. What are the pros and cons of these new financial institutions and services?
2. What is their potential impact on households, firms, and economic growth?
3. How can they be integrated into developed financial systems in order to maximise their impact?
4. Do they need regulation? Moreover, if yes, how should such regulation looks like.