Thesis_gd_final_vers.. - Vernimmen

Progress in both financial and information technology have given banks new means to
manage their risks and interest rate exposures. This was made possible by the development of
increasingly sophisticated risk-models thanks to the rise in computing capacity, and new financial
products such as derivatives that offer the possibility to implement complex and targeted risk
management policies. In the 1990s, banks began to use new tools based on Value-at-Risk (VaR).
Moreover the Basle Capital Accord adopted by the largest banks in the late 1990s and early 2000s
went one step further in increasing the link between regulatory capital requirements and credit or
asset risk. To comply with this new regulatory framework, banks have been continuing to develop
their risk management models to estimate their exposures, default rates, loss given default, etc.
Internet also revolutionized front-office technologies and banking was no exception. The
most widespread strategy has become the click-and-mortar, which combines a website with an
existing network of branches and ATMs. Indeed, there were very few internet-only independent
players and most of them have failed or shut their operations. Internet-only subsidiaries of large
banks have also been reconverted to participate in a click-and-mortar strategy. We can distinguish
between two types of websites: informational ones and transactional ones. According to Berger
(2003), 37.3% of national banks have a transactional website and an additional 27.7% have only an
informational website in 2002. The adoption rate of transactional website is very much linked to
the bank size, with 100% of banks with more than 10 billions in total assets having one in 2000
and only 20% of banks with 100 million or less in total having one. However the adoption rate has
been rapidly increasing. Even though Internet remains a marginal channel in the distribution of
banking product and services it has been gaining share against other channels and helped reduce
costs as well as problems associated with geography and distance.
ii) Technological change impact on bank concentration
Technological change has favoured bank concentration through mergers and acquisitions for
several reasons. First, new technologies and financial products have created strong potential
economies of scale. Deregulation coupled with technological innovation may have allowed the
largest commercial banks to create new services and products which bear significant economies of
scale: it is true for example for Internet-banking, ATMs, call-centers. Concerning wholesale and
investment banking, larger banks have developed technology driven businesses where a large scale
is a decisive advantage: derivatives, securitization and other off-balance sheet activities. At the
same time new technology applied to existing products and services also generated higher
potential economies of scale: it is true for electronic payment or credit scoring which has replaced
relationship and soft information at larger banks because these methods bear high diseconomies
of scale. The importance of size is shown by the fact that larger banks have always been the first to
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