Journal of Financial Economics

REF 142 The Future of Financial Intermediation

The monetary and financial system of developed countries is in constant move, to accommodate changes in the technological, political and social conditions. After a period of “national welfare capitalism”, post WWII, and the “global liberal capitalism” spreading over the 1980-2010 period, we enter a new era, where systemic crisis follow one another, putting a stop to globalization and multilateralism. The rules and principles that used to prevail are no longer accepted and state supervision is tighter.

We try to characterize the slow move of the financial system: on the monetary side, we put forward seven statements which, in our opinion, will shape monetary policy and the role of central banks in the years to come. This inexorable drift brings the financial system towards a dangerous, old fashioned return of inflation and financial repression.

The 2008 crisis had stigmatized the shadow banking system as resulting of deviant behavior of banks seeking to take advantage of regulatory loopholes. Some had called for its disappearance. Far from having disappeared, shadow banking in 2021 can no longer be approached as a marginal phenomenon. It must now be analyzed as the structural form of the contemporary financial and banking system: it shapes the role and functions of the members of the system, ensures its viability but is also at the heart of its fragility. This article highlights the essential role of shadow banking in transforming the hierarchy of monetary liquidity (Part 1) and in maintaining banking and financial activities despite a deteriorated economic context (Part 2).

Following the 2008 financial crisis, the eurozone financial system was profoundly reconfigured. In the absence of the key factors that supported the development of market finance in the United States, however, the way the European economy is financed has not been radically transformed. While central banks' interventions were adapted to the respective characteristics of the financial systems on both sides of the Atlantic, recent crises have reduced their polarisation. Finally, it appears that the financing structures of economies do not have as much effect on the nature of the counterparts of the money supply as on the size of the latter in proportion to national wealth. Two unique features of the US (the relative co-occurrence of capital inflows and outflows and loan securitisation) help explain this phenomenon.

The “social responsibility” of investors is at the heart of a number of contemporary debates. This paper questions the past and the future of this concept. First, it shows that “socially responsible investment” is historically a contradiction in terms: the figure of the investor – who provides capital but does not participate to the management of a firm – could only appear when the liability of shareholders was limited. Understanding the revolution introduced by the generalization of limited liability helps to shed light on contemporary debates on “socially responsible” investment, and to highlight its limitations. Finally, this paper argues in favor of alternative, stronger, forms of investor liability. If implemented, these proposals would deeply change the structure of financial intermediation.

Banking intermediation has constantly evolved over the last decades to adapt to the changes in the economic and regulatory environment. This article traces the main stages of this transformation, from the “boring” banks of the “Trente Glorieuses” period to the current stage of “shadow banking”, at the heart of the great financial crisis of 2008. A comparative typology of the main forms of intermediation is presented. Recent and future developments in banking intermediation in the context of the digital revolution are also analyzed.

How far should we go in separating the business of lending from the business of deposit and money management within the banking system? This is a debate that is taking on new vigour today and that is revisited by the present article in the light of monetary history. Indeed, the arguments exchanged over the last two centuries are still relevant today. The article focuses particularly on two major episodes in the history of monetary reforms: that of 1844 in the United Kingdom and that of 1935 in the United States. This debate has been rekindled today following the major technological breakthrough in the means of payment that has occurred over the past decade. What was advocated by the supporters of the separation of the lines of business may very well become unavoidable following the rise of digital currencies, especially those issued by central banks?

The traditional business model of commercial banks exploits economies of scale between deposits and credit. New information technologies (Fintechs) and giant internet platforms (Bigtechs) are putting this model in serious jeopardy. Bigtechs even threaten the monetary sovereignty of states by potentially offering citizens of the world new currencies that are beyond the control of those states, such as Facebook's Global Stablecoin project Diem. This threat explains why many jurisdictions are seriously considering the creation of central bank digital currencies (CBDCs), so as discourage Fintech firms from creating new currencies. We analyze these upheavals and their foreseeable consequences and advocate for the development of a real public policy on payments.

The monetary policy conducted by the European Central Bank (ECB) over the past decade and the demographic and structural changes in our societies have led the economies of the eurozone towards an environment of persistently low interest rates. While the latter has made possible to avoid deflation, it is also a source of concern for the banking sector. However, even though the marked flattening of the interest rate curve may have sharply compressed the intermediation margin of some commercial banks in the euro zone, the decline in the interest margin observed in France in recent years appears to be relatively contained. Moreover, the effect of low rates on profitability is more than uncertain. Indeed, low rates will asymmetrically affect the main components of bank profitability. In particular, improved macroeconomic conditions and lower loan loss provisions can be expected to offset the contraction in interest income. The empirical exercise conducted in this article on a sample of large listed euro area banks shows that the easing of monetary policy has had a positive effect on the economic profitability of banks.

The consolidation of the European banking sector could increase again with the health crisis. Its impact on the soundness of the sector and the availability of financing is often discussed, its measurement much less so. However, in this article we draw attention to a problematic aspect of concentration or market power measurements. These are generally based on unconsolidated data, which means that the national market power of groups is ignored. This results in an underestimation that we propose to correct. Our correction, based on SURFI data from the Banque de France, raises the share of assets of the five largest resident banks in the total assets of the French banking sector by about 30 percentage points. This underestimation is not neutral from the point of view of prudential policies: concentration is clearly not the same problem depending on whether it is assessed at 50% or 80%.

Development banks have shown themselves to be key players in the face of the pandemic crisis. They were also among the first financial actors to transform themselves in recent years to meet the needs of ecological reconstruction. This capacity to adapt and innovate in the face of changing development models is rooted in a long history that goes well beyond the rhetorical framework of market imperfections. It is also based on the existing dynamics of the global financial architecture, while at the same time helping to shape them. Like the current proposal for a Liquidity and Sustainability Facility, development banks could thus redirect private investment flows by subsidizing the perceived or real risks of the ecological and social projects to be financed. This strategy carries the risk of accentuating the pro-cyclical bias of such financing without necessarily guaranteeing its ecological character. Like the green deals projects, they could also directly support economic and social sectors of general interest by responding to a locally and democratically formulated demand. Ultimately, the future forms of intervention by development banks are shaped by the immediate responses to the pandemic crisis.

Within financial industries, asset management is one of those the general public know the least. Still, it's now a key stakeholder for financing economies and it has been enjoying an ongoing and strong growth, without any major disruption from financial crisis nor pandemics. As of late, this growth has been channeled, or even triggered, by three major forces. First, the structural decrease of interest rates increased the inflows into investment funds. Second, albeit as much disrupted by digitalization as the overall economy, asset management is still mostly insultaed from competing internet behemoths. Last, both clients and regulators are forcing asset managers to use environmental, governance and social concerns as prerequisites to serve financial returns to investors.

The persistent and structural low level of interest rates has been accompanied by increased risk-taking by investors in financial markets, raising fears of greater financial fragility and a systemic crisis emanating from shadow-banking. This increased risk-taking can be seen among different kind of investors (from individual investors to institutional ones) and through different mechanisms (behavioural and incentives). However, the economic impact of the Covid-19 pandemic did not turn into a systemic crisis since it mainly affected sectors that were weakly represented on financial markets, and above all due to an unprecedented policy mix. In doing so, monetary policy has further exacerbated low interest rates and bond yields.

After a decade in which life insurance fundraising had weathered the continued decline in interest rates, their entry into negative territory in 2019 exposed some limitations of its business model. Indeed, the appearance of negative nominal interest rates increases the fall in the rate of return on life insurers' assets; past commitments in terms of technical rates limit reductions in the revaluation rate; the annual remuneration of these life insurance contracts is a factor in customer attractiveness and competition, which, all other things being equal, further reduces the potential for lower revaluation rates. In this article, we analyze the mechanisms by which the decline and the maintained environment of low interest rates have affected the balance sheet of life insurers, called into question the viability of their business model and the challenges they face to make it evolve.

The world is changing, the universe of risks is expanding, and the conditions for doing insurance business are becoming more complex. Insurance, which largely reflects the tensions and contradictions of its environment, must adapt to the changes and fluctuations that are taking place in this environment. Faced with an industry that has been changing while retaining strong traditional components, many experts have been announcing for nearly ten years the coming great disruption of insurance. But, this is slow to come and the few challenging initiatives did little to shake traditional players. However, the current strategic challenges force insurance to adapt and change fundamentally. This article aims to identify these strategic challenges, analyze the industry's capacity to meet them and assess the changes they will ultimately impose on insurers.

This article aims to put in a historical perspective the evolution of investment banking, the name that has become universal for the activities of investment banks and, often even more widely, wholesale banking, since the creation of large banks and investment banks in the second half of the 19th century until the crisis of 2008 when the corporate andiInvestment banking model became the dominant business model, on both sides of the Atlantic, to the detriment of the pure investment bank or broker-dealer model. Historically, the distinction between the activities of commercial banks and investment banks was based on the fact that the former provided short-term financing while the latter focused on long-term financing for governments and companies, through the issuance of shares and bonds, playing an intermediary role on the markets, the essence, in fact, of the investment banker business.