TECHNOLOGICAL FORECASTING

Technological Forecasting

Technological Forecasting

Industries which experiencing rapid technological changes

Technological changes in Banking Sector:

The commercial banking business has changed dramatically over the past 25 years, due in large part to technological change. Advances in telecommunications, information technology, and financial theory and practice have jointly transformed many of the relationship focused intermediaries of yesteryear into data-intensive risk management operations of today. Consistent with this, we now find many commercial banks embedded as part of global financial institutions that engage in a wide variety of financial activities.

Advances in telecommunications, information technology, and financial theory and practice have jointly transformed many of the relationship focused intermediaries of yesteryear into data-intensive risk management operations of today.

Consistent with this, we now find many commercial banks embedded as part of global financial institutions that engage in a wide variety of financial activities. To be more specific, technological changes relating to telecommunications and data processing have spurred financial innovations that have altered bank products and services and production processes. For example, the ability to use applied statistics cost-effectively (via software and computing power) has markedly altered the process of financial intermediation.

Retail loan applications are now routinely evaluated using credit scoring tools, rather than using human judgment. Such an approach makes underwriting much more transparent to third parties and hence facilitates secondary markets for retail credits (e.g., mortgages and credit card receivables) via securitization.2 Statistically based risk measurement tools are also used to measure and manage other types of credit risks - as well as interest rate risks - on an ongoing basis across entire portfolios. Indeed, tools like value-at-risk are even used to determine the appropriate allocation of risk-based capital for actively managed (trading) portfolios.

Financial Innovation and Banking: 1980-2005

In this section, we survey the literatures pertaining to several specific financial innovations appearing over the past 25 years or so that were specifically driven by technological change. We have organized our discussion along the lines of the three major categories that we described in Section 2: new products and services; new production processes; and new organizational forms.

Products

Mortgage loans are one suite of products that have experienced a great deal of change over the past 25 years in the United States. In 1980, long-term fully amortizing fixed-rate mortgages were the norm; and this product was offered primarily by thrift institutions. Moreover, these loans required substantial down payments and a good credit history; and the accumulated equity was relatively illiquid. These characteristics have markedly evolved. The first big change occurred in the early 1980s with the widespread introduction of various types of adjustable-rate mortgages (ARMs), which had previously been banned by federal regulators.

Subprime mortgage lending, broadly defined, relates to borrowers with poor credit histories (e.g., a FICO score below 620) and/or high leverage as measured by either debt/income (personal leverage) or loan-to-value (property leverage). This market grew rapidly in the U.S. during the first decade of the twenty-first century - averaging about 20% of residential mortgage originations between 2004 and 2006. At the end of 2007, subprime mortgages outstanding ...