Could the provision of financial services via public computer networks increase the need for banking regulation and supervision?
An increase in public intervention would be necessary if network banks were more vulnerable to bank failures, bank runs, and systemic risks. Consider the potential for bank runs first. Network bank are more vulnerable to bank runs for the following reasons: • Information and rumors spread quickly across the Internet. The rapid spread of information is most relevant for so-called fundamental or information-based bank runs. In a fundamental bank run, depositors realize that the value of assets in the bank is low and that withdrawing is the dominant strategy (Vives, 1991). The rapid spread of rumors could also increase the potential for panic bank runs, which are unrelated to any fundamentals. This issue reminds us of the many virus alerts that sweep through the Internet. For example, postings on the Internet about a plain electronic mail message that, when opened, erases all files on the reader’s hard disk induces panic; in reality it is not possible to get infected by just a plain e-mai
Related Questions
- How will Gibraltars Financial Services Commission standards of regulation compare with other European regulatory bodies such as the FSA?
- Could the provision of financial services via public computer networks increase the need for banking regulation and supervision?
- How does the international dimension of network banking potentially affect supervision and regulation?
