Book contents
- Frontmatter
- Contents
- Preface
- 1 Introduction to Network Economics
- 2 The Hardware Industry
- 3 The Software Industry
- 4 Technology Advance and Standardization 81
- 5 Telecommunication
- 6 Broadcasting
- 7 Markets for Information
- 8 Banks and Money
- 9 The Airline Industry
- 10 Social Interaction
- 11 Other Networks
- Appendices
- Index
8 - Banks and Money
Published online by Cambridge University Press: 25 May 2010
- Frontmatter
- Contents
- Preface
- 1 Introduction to Network Economics
- 2 The Hardware Industry
- 3 The Software Industry
- 4 Technology Advance and Standardization 81
- 5 Telecommunication
- 6 Broadcasting
- 7 Markets for Information
- 8 Banks and Money
- 9 The Airline Industry
- 10 Social Interaction
- 11 Other Networks
- Appendices
- Index
Summary
The banking industry displays many characteristics of other network industries. For example,
Network effects: People tend to associate larger banks with more stable ones, that is, banks with a lower probability of realizing bankruptcy.
Network services: Banks perform a wide variety of services involving money transfers and payments among individuals, firms, and the government. From an operational point of view, a money transfer between two accounts belonging to the same bank constitutes an entirely different operation than a money transfer between accounts belonging to different banks.
Switching costs and lock-in: Consumers must bear a significant cost of moving their financial activities from one bank to another. Section 8.1 demonstrates how the presence of these switching costs reduces the competition in the banking industry.
Cash withdrawals: Since cash (currency) is widely used in trade, and since currency is costly to store, individuals resort to frequent cash withdrawals mainly from automatic teller machines (ATMs). If banks share the same network, then customers of one bank can withdraw cash from an ATM owned by a competing bank. Thus, ATMs generate network of users who can withdraw cash from a network of machines. Section 8.2 analyzes how competition among banks is affected by having banks sharing their ATMs.
Panics and bank runs: Most banks maintain less than a 10% reserve ratio. This means that banks can easily be subjected to panics each time a small number of depositors demand their deposits in the form of cash and spread the rumor that the bank has run out of money.
- Type
- Chapter
- Information
- The Economics of Network Industries , pp. 187 - 214Publisher: Cambridge University PressPrint publication year: 2001