A New Framework for Banking Competition : Protecting the Value of Bank Specialness

We introduce a new framework for banking competition to protect favorable economic and financial consequences of bank specialness and mitigating unfavorable consequences. We also broaden the existing bank specialness concept. which embodies implicit unnecessary assumptions that would prevent implementation of the new competition framework. Our broadened specialness concept incorporates both unfavorable and favorable consequences; covers contributions of all assets, liabilities, and off-balance sheet activities that allow banks to create liquidity and transform risk for customers; includes acquiring/processing information and designing/enforcing financial contracts methods to perform these special roles; incorporates coordination economies in supplying multiple services to address customer needs; and allows for specialness provided by other institutions/markets as well as banks. We assess potential future competitive threats and contributions to specialness from Digital Technology Firms (DTFs) of FinTech, BigTech, and DeFi. We add content on financial innovations that apply to banking, and compare our new framework with findings from two and a half centuries of competition debate, drawing a “bigger picture” of banking competition with research and policy implications