Advancing information technology and financial intermediation

The whole financial sector has been under a remarkable structural change, and one of the major contributing forces has been the rapid advance in information processing based on digital technology. The purpose of this paper is to model the influence of advancing information and transaction technology on the financial markets and assess the consequent structural changes within the different forms of banking. The overall conclusion is that improving information technology increases the transparency of firms and the liquidity of capital market instruments. This development favors market-based finance at the cost of traditional financial intermediaries. Traditional bank lending will also benefit, but this benefit is not sufficient to compensate its losses to market-based finance. The welfare effects will be positive because now a smaller amount of profitable projects are rejected due to insufficient information and market transparency.