I Do What I Do

by Raghuram G. Rajan

Private investment is risky, so there has to be more risk-absorbing financing such as from corporate bond markets and from equity markets. As more sources of financing emerge, not only will banks no longer be able to have a monopoly over financing corporations and households, they will also have to compete for the best clients, who can access domestic and international markets. Similarly, deposit financing will no longer be as cheap, as banks will have to compete with financial markets and real assets such as housing for the household’s savings. As households become more sophisticated, they will be unwilling to leave a lot of money in low-interest-bearing accounts. Of course, households will still be willing to accept low interest rates in return for liquidity. So privileged access to the central bank’s liquidity windows will allow banks to offer households these liquidity services safely and get a rent, but this advantage will also become eroded as new payments institutions and technologies emerge.