Banks, Digital Banking Initiatives and the Financial Safety Net: Theory and Analytical Framework

Updata:01-01-1970

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By:Stephen Lumpkin, Sebastian Schich

DOI: https://doi.org/10.30564/jesr.v3i1.1113

Abstract:
This report presents an analytical framework for exploring the implica
tions of Fintech innovations for incumbent banks and for provision of the
financial safety net. The focus is on “digital banking initiatives”, that is,
on Fintech initiatives that provide retail financial services akin to those
traditionally provided by banks. Banks perform a wide range of functions
for individual and institutional customers that help facilitate large-scale
economic activity. In fact, in most economies the system of financial
intermediation centres on banks and relies on their core products and
services for financing of the economy and the maintenance of liquidity.
On account of the central role banks play in the financial system, along
with concerns about potential systemic instability linked to the riskiness
of their activities, these institutions have long been regarded as “spe
cial”, as reflected in their prudential regulation and coverage under the
various provisions of the financial safety net. Recent developments raise
questions about the special status of banks. Two sets of questions are ad
dressed herein: To what extent do new digital banking initiatives change
the role that incumbent banks play in the financial system and the way
that they perform their functions? To what extent are some of the new
digital banking initiatives securing the benefits of the financial safety net
without paying the commensurate price? To help address these questions
the report first revisits the literature on core functions of the financial sys
tem to provide a framework for analysing recent developments. Particular
attention is paid in this context to banks and their products and services.
The “special” role of banks is discussed, which links to the provisions
of the traditional safety net. These overview sections are followed by
evidence on Fintech innovations that overlap the core banking products.
Based on an examination of the characteristics of these new initiatives,
the study then touches on the issue of whether banks are still special and
whether some of these initiatives are or should be covered by financial
safety net provisions.
References:

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