THE PAST AND FUTURE OF COMMERCIAL BANKING VIEWED THROUGH AN INCOMPLETE CONTRACT LENS

Commercial banks emerged at a time when contracts were very incomplete and property rights insecure. They typically offered demand deposits, made loans on demand, and were regulated. Each of these aspects of th e institutional structure were essential in helping the bank provide t he twin functions of liquidity and safety. I argue that recent theorie s of banking, which I collectively refer to as ''Incomplete Contract'' theories of banking, explain well the origins of banking. I also clai m that they can explain recent changes in banking: as the informationa l, legal, and property rights environment has improved, there appear t o be fewer synergies between various aspects of the traditional instit utional structure of the bank. In developed countries, it is now time to think whether there is anything special about the institutional for m of the bank, or whether all that is special is that it is regulated.