This document presents four scenarios for the future of finance. The goal of our study is to imagine the future of finance and to identify challenges faced by policymakers in fighting systemic risk. It builds upon a tradition within the CPB to develop scenarios for policy analysis.
We develop four scenarios for the future of finance. Our scenarios differ in two dimensions. First, to what extent soft information lies at the core of banks’ business. Second, to what extent scope economies exist between different banking activities.
By combining these two dimensions, we obtain four scenarios: Isolated Islands, Big Banks, Competing Conglomerates, and Flat Finance. Market structure, market failures, and government failures vary between scenarios.
These differences then translate into differences in the complexity of balance sheets, the ability to coordinate policy internationally, the information gap faced by regulators, the size of banks’ balance sheets, the tradability of banks’ assets, the level of interconnectedness, the potential for market discipline, and the threat of regulatory capture. As a result, each scenario calls for a different set of policies to combat systemic risk.
