The Decline of Traditional Banking: Implications for Financial Stability and Regulatory Policy

21 Pages Posted: 13 Nov 2007

See all articles by Franklin R. Edwards

Franklin R. Edwards

Columbia Business School - Finance and Economics

Frederic S. Mishkin

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

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Abstract

In recent years, the traditional business of banks - making long-term loans and funding them by issuing short - dated deposits-has declined. This development has raised concerns that more banks will fail or be forced to assume greater risk to remain profitable. This article first examines the economic forces responsible for banks' reduced role in financial intermediation. The authors then consider whether banks may be jeopardizing the stability of the financial system by extending riskier loans or engaging in derivatives dealing and other 'nontraditional' financial activities that bring higher returns but could carry greater risk. The authors conclude that because most nontraditional activities expose banks to risks and moral hazard problems similar to those associated with banks' traditional activities, the new activities can be regulated as effectively as the old.

Keywords: nontraditional financial activities, risk, regulation

JEL Classification: G1, G21

Suggested Citation

Edwards, Franklin and Mishkin, Frederic S., The Decline of Traditional Banking: Implications for Financial Stability and Regulatory Policy. Economic Policy Review, Vol. 1, No. 2, July 1995, Available at SSRN: https://ssrn.com/abstract=1029618

Franklin Edwards (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Frederic S. Mishkin

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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