Abstract
Firms’ financial structure has changed drastically over the last decades. Entrepreneurs can get access to direct financing much more easily than they used to. With accelerating financial innovation, this better access to financial markets coincides with financial deepening, and it importantly contributes to disintermediation. To accommodate this structural mutation, banking regulation has adapted. It now allows financial institutions to be much more involved in market-based activities (e.g., securitization, investment banking and trading). Consequently, the banking landscape has completely mutated compared to the traditional model of the seventies. This paper discusses the implications of such a change for the future of banking, with a particular focus on the challenges related to macroprudential policies and tools, as they currently stand, and as they are likely to evolve to fulfil their role – i.e., optimally -- in monitoring and supervising bank systemic risk.
Highlights
In the early eighties market conditions change drastically and firms began to rely increasingly on direct financing to finance their investment projects
This structural change has been observed in many countries, and several authors have documented its impact on banking. In their seminal work on the subject, Boyd and Gertler [1] reflect on disintermediation and ask the following question: Are banks dead? Based on U.S data, their answer is a resounding ‘’No’’. They argue that, bank profits are doing very well, except that the growth in bank income tends to be attributable, for a substantial part, to business lines only indirectly related to lending, and to nontraditional activities reported off balance-sheet
When running the same kind of experiments based on Canadian data, we find that the asset-equivalent series of Noninterest Income Generating Activities (N.I.G.A.) computed with the methodology of Boyd and Gertler [1] has grown substantially in the most recent decades (Figure 2)
Summary
In the early eighties market conditions change drastically and firms began to rely increasingly on direct financing to finance their investment projects. In Canada, when we compute the ratio of direct versus indirect financing, the U-Shaped curve which unfolds clearly indicates a long-term increasing trend in direct financing, only temporarily slowed by the subprime crisis (Figure 1) This structural change has been observed in many countries, and several authors have documented its impact on banking. When running the same kind of experiments based on Canadian data, we find that the asset-equivalent series of Noninterest Income Generating Activities (N.I.G.A.) computed with the methodology of Boyd and Gertler [1] has grown substantially in the most recent decades (Figure 2).
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