Technological change, financial innovation, and diffusion in banking

This paper discusses the technological change and financial innovation that commercial banking has experienced during the past twenty-five years. The paper first describes the role of the financial system in economies and how technological change and financial innovation can improve social welfare. We then survey the literature relating to several specific financial innovations, which we define as new products or services, production processes, or organizational forms. We find that the past quarter century has been a period of substantial change in terms of banking products, services, and production technologies. Moreover, while much effort has been devoted to understanding the characteristics of users and adopters of financial innovations and the attendant welfare implications, we still know little about how and why financial innovations are initially developed.Technological innovations

Fussing and fuming over Fannie and Freddie: how much smoke, how much fire?

The roles of Fannie Mae and Freddie Mac have become increasingly controversial in the modern world of residential mortgage finance. The authors describe the special features of these two companies and their roles in the mortgage markets and then discuss the controversies that surround the companies and offer recommendations for improvements in public policy.

Emerging competition and risk-taking incentives at Fannie Mae and Freddie Mac

This paper examines two major forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the expansion of Federal Home Loan Bank mortgage purchase programs and (2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). The authors argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence their franchise values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two GSEs. It is this last consequence that warrants greater regulatory awareness.

Empirical studies of financial innovation: lots of talk, little action?

This paper reviews the extant empirical studies of financial innovation. Adopting broad criteria, the authors found just two dozen studies, over half of which (fourteen) had been conducted since 2000. Since some financial innovations are examined by more than one study, only fourteen distinct phenomena have been covered. Especially striking is the fact that only two studies are directed at the hypotheses advanced in many broad descriptive articles concerning the environmental conditions (e.g., regulation, taxes, unstable macroeconomic conditions, and ripe technologies) spurring financial innovation. The authors offer some tentative conjectures as to why empirical studies of financial innovation are comparatively rare. Among their suggested culprits is an absence of accessible data. The authors urge financial regulators to undertake more surveys of financial innovation and to make the survey data more available to researchers.Financial modernization ; Banks and banking ; Patents ; Securities

The diffusion of financial innovations: an examination of the adoption of small business credit scoring by large banking organizations

Financial innovation has been described as the “life blood of efficient and responsive capital markets.” Yet, there have been few quantitative investigations of financial innovation and the diffusion of these new technologies. Of the latter, there have been only three prior quantitative studies, and all three used the same data set on automated teller machines! ; This paper makes a significant contribution to the financial innovation literature by examining the diffusion of a recent important innovation of the 1990s: banks’ use of credit scoring for small business lending. The authors examine the responses of 95 large banking organizations to a survey that asked whether they had adopted credit scoring for small business lending as of June 1997 (56 had done so) and, if they had adopted it, when they had done so. The authors estimate hazard and tobit models to explain the diffusion pattern of small business credit scoring models. Explanatory variables include several market, firm, and managerial factors of the banking organizations under study. ; The hazard model indicates that larger banking organizations introduced innovation earlier, as did those located in the New York Federal Reserve district; both results are consistent with expectations. The tobit model confirms these results and also finds that organizations with fewer separately chartered banks but more branches introduced innovation earlier, which is consistent with theories stressing the importance of bank organizational form on lending style. Though the managerial variables signs are consistent with our expectations, none yields significant results.Credit scoring systems ; Financial modernization ; Commercial loans ; Bank loans

The Diffusion of Financial Innovations: An Examination of The Adoption of Small Business Credit Scoring by Large Banking Organizations

Financial innovation has been described as the "life blood of efficient and responsive capital markets." Yet, there have been few quantitative investigations of financial innovation and the diffusion of these new technologies. Of the latter, there have been only three prior quantitative studies, and all three used the same data set on ATMs! This paper makes a significant contribution to the financial innovation literature by examining the diffusion of a recent important innovation of the 1990s: banks' use of credit scoring for small business lending. We examine the responses of 95 large banking organizations to a survey that asked whether they had adopted credit scoring for small business lending as of June 1997 (55 had done so) and, if they had adopted it, when they had done so. We estimate hazard and tobit models to explain the diffusion pattern of small business credit scoring models. Explanatory variables include several market, firm, and managerial factors of the banking organizations' under study. The hazard model indicates that larger banking organizations innovated earlier, as did those located in the New York Federal Reserve district; both results are consistent with our expectations. The tobit model confirms these results and also finds that organizations with fewer separately chartered banks but more branches innovated earlier, which is consistent with theories stressing the importance of bank organizational form on lending style. Though the managerial variables' signs are consistent with our expectations, none yields significant results.Credit Scoring; Small Business Lending; Financial Innovation; Technology Diffusion

Still flat after all these years

The Universe could be spatially flat, positively curved or negatively curved. Each option has been popular at various times, partly affected by an understanding that models tend to evolve away from flatness. The curvature of the Universe is amenable to measurement, through tests such as the determination of the angles of sufficiently large triangles. The angle subtended by the characteristic scale on the Cosmic Microwave sky provides a direct test, which has now been realised through a combination of exquisite results from a number of CMB experiments. After a long and detailed investigation, with many false clues, it seems that the mystery of the curvature of the Universe is now solved. It's an open and shut case: the Universe is flat.Comment: 7 pages, 2 figures, submitted to the Gravity Research Foundation Essay Competition for 200

Technological Change, Financial Innovation, and Diffusion in Banking

The commercial banking business has changed dramatically over the past 30 years, due in large part to technological change. The paper first describes the role of the financial system in economies and how technological change and financial innovation can affect social welfare. We then survey the literature relating to several specific financial innovations – broadly categorized as new products or services, new production processes, or new organizational forms – and evaluate them in the context of the broader economics literature on innovation. While much effort has been devoted to understanding the characteristics of users and adopters of financial innovations and the attendant welfare implications, we still know little about how and why financial innovations are initially developed

Empirical Studies of Financial Innovation: Lots of Talk, Little Action?

This paper reviews the extant empirical studies of financial innovation. Adopting broad criteria, we found just two-dozen studies (24), over half of which (14) had been conducted since 2000. Since some financial innovations are examined by more than one study, only 14 distinct phenomena have been covered. Especially striking is the fact that only two studies are directed at the hypotheses advanced in many broad descriptive articles concerning the environmental conditions (e.g., regulation, taxes, unstable macroeconomic conditions, and ripe technologies) spurring financial innovation. We offer some tentative conjectures as to why empirical studies of financial innovation are comparatively rare. Among our suggested culprits is an absence of accessible data. We urge financial regulators to undertake more surveys of financial innovation and to make the survey data more available to researchers