The changing nature of financial intermediation and its implications for monetary policy
Hans Genberg 1
Monetary policy influences the economy through its effects on credit conditions facing households and firms, for example, the interest rates available on bank deposits and bank loans, and the cost of capital for firms, be it in the form of bank credit, debt issued on the capital market, or equity. While it is convenient for analytical purposes to assume that the monetary authority controls the relevant credit conditions directly through its control of a short-term policy interest rate, this simplification leaves no role for a banking system or for financial intermediation more generally. It thus precludes an analysis of how changes in the nature of financial intermediation may impact the conduct of monetary policy. This paper builds on a relatively recent but growing literature which puts financial intermediation and financial intermediaries back into macroeconomic models and attempts to draw some conclusions about how central bank policy may need to adjust to accommodate changes in the structure of financial intermediation. It starts by documenting the evolution of financial intermediaries and financial intermediation as observed mainly in developed economies, although arguably this will become a feature of emerging-market and developing economies as well. It is suggested that the traditional distinction between bank-based and market-based financial systems is becoming outdated and should be replaced by a distinction between relationship-based and arm’s length interaction between borrowers and lenders. Developments also suggest that markets are becoming more complete and that risk management and distribution by both institutions and households is becoming more efficient. Implications of these developments for monetary policy are discussed in Sections 2 and 3. In the former it is briefly pointed out that central bank operating procedures will be...