Abstract
This chapter examines how banks evolve, and how they interact with financial markets, with special emphasis on the blurring of boundaries between banks and markets, and the role of financial innovation. We begin with a discussion of the link between financial development and economic growth, and follow this with an examination of the role of financial innovation in this link. Both the bright and dark sides of financial innovation are discussed. Then we move on to the interaction between banks and markets. We end with a discussion of the competitive and complementary aspects of this relationship and the role of securitization, shadow banking, and credit-rating agencies in this dynamic.
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