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Rev Fin 1997; 10:1099-1131
© 1997 the Society for Financial Studies

Article

Banking scope and financial innovation

AWA Boot and AV Thakorz
University of Amsterdam, The Netherlands
z Corresponding author at: Edward J Frey Professor of Banking and Finance, University of Michigan Business School, 701 Tappan Street, Ann Arbor, MI 48109, USA

Abstract

We explore the implications of financial system design for financial innovation. We begin with assumptions about the investment opportunities of firms, their observable attributes, and the roles of commercial banks, investment banks, and the financial market. We examine the borrower's choice between bank and financial market funding, the commercial bank's choice of monitoring capacity, and the investment bank's choice of whether to invest in financial innovation. Our main result is that financial innovation in a universal banking system is stochastically lower than innovation in a financial system in which commercial and investment banks are functionally separated.


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