Financial technologies such as bitcoin, peer-to-peer lending, and crowdfunding are fledgling industries now, filled with companies that are little immediate threat to traditional commercial banking. But Chicago Booth’s Randall S. Kroszner points out that their growth has serious implications for banking, monetary policy, and the ability of central banks to shape them.
Research by Kroszner, a former Federal Reserve Board governor, includes insights into how a rise in new forms of banking, which eschews the traditional model of collecting deposits for lending, diminishes central banks’ powers to manipulate economies through standard monetary policy. Controlling bank interest rates—tightening or loosening credit by adjusting bank reserves—may have a more limited economic effect when other funding sources in digital currencies are widely used. A bitcoin doesn’t need a bank or a central bank.
Kroszner indicates that commercial banking remains strong, citing as evidence the rise in bank loans relative to other types of loans after the financial crisis. He also notes a few factors that give traditional commercial banks advantages over newcomers—for example, customer relationships that involve deposit-taking and lending give commercial banks helpful information they can use when making credit judgments.
The question for the future, he suggests, is whether a large tech company such as Google or Amazon or an upstart could develop technologies that would overcome the banks’ innate advantages; perhaps, for example, by amalgamating and selling the type of borrower details that are currently exclusive to banks or much more comprehensive than banks can compile today. Could a key innovation spark a boom in competition for banks?
That disrupter hasn’t arrived yet. Kroszner finds no evidence that a revolution in money and banking has arrived. But such fundamental change, he reckons, could well come in the next decade or two.