The Provision of Financial Services – Trends, Prospects and Implications

The paper considers recent trends in the provision of finance and the factors that are likely to influence its future course. It emphasises how the interaction between the allocation of household wealth and the financing needs of firms shape the structure and evolution of financial systems. The paper focuses on the experiences of banks, and argues that as the 1990s proceed they will face increased competition on both sides of their balance sheets. However, several factors are likely to provide banks some competitive advantage. The most important is that a large pool of borrowers cannot raise funds other than through banks. On the asset side of their balance sheets, the intermediation of funds to small and medium-sized businesses is thus a core function which differentiates banks from other financial institutions and the securities markets generally. But banks also have advantages on the liabilities side of their balance sheets, as they offer depositors a safe and highly liquid repository for their funds. The paper argues that the extent to which banks remain the institutional core of the financial system will depend on their ability to perform their traditional lending role. It concludes by speculating about the implications for the stability of the financial system of the structural changes which have occurred.