Medearis and his two cofounders of Silicon Valley Bank wished to tackle the antiquated banking practices that led to a massive reduction in the number of banks, the disappearance of community banks, and the mergers of Big Banks. Bank regulations and culture prevent banks from embracing tech startups and entrepreneurs as lending clients. The SVB founders knew about Bank of America’s abandonment of its early tech lending, missed opportunities, and bank failures to capture tech startups and entrepreneurs. The old, conservative banking environment during the early days of the tech sector presented the founders with an opportunity.

The channels identified as highly vulnerable to money laundering activity are money remitters (both licensed and underground operators), corporate vehicles, designated non-financial businesses and professions, and the banking sector. As gatekeepers of the financial system, banks are required to develop and implement policies and practices that mitigate the money laundering risks that apply to them. Banks that use AI have the potential to make anti-money laundering (AML) measures faster, cheaper, and more efficient. AI could help to identify risks and respond to, communicate and monitor suspicious activity more effectively, ultimately assisting banks in maintaining compliance with AML standards. This chapter aims to shed light on the advantages and challenges of adopting AI to mitigate money-laundering risks and protect the integrity of the financial system.

Banks provide vital services to the economy: mobilizing, allocating, and monitoring the use of savings, by firms and individuals; providing mechanisms for pooling and managing risks; and facilitating trade in goods, services, and securities. When banking systems perform well, for example by improving the allocation of resources, they accelerate long-run economic growth. Furthermore, better-functioning banks disproportionately help lower-income families by funneling capital to the most promising entrepreneurs, rather than to those from the most connected families. By improving the efficiency of capital allocation, better-functioning banks create a more competitive environment in which workers face more dynamic labor markets, thus enhancing the economic opportunities available to people who may never receive a loan or start a business. Recent research also finds that regulatory reforms that spur competition among banks not only improve the economy; they also lower crime, ease financing constraints, increase schooling, shrink racial wage gaps, and help alleviate mental depression. This suggests important connections between finance and prosperity.

In Chapter 6, I discuss the importance of financial sector reform, focusing on the banking sector, the bond market, and the stock market. The banking sector is still characterized by financial repression. The largest banks are all state-owned, the interest rates are not market-determined, and state-owned enterprises (SOEs) still enjoy preferential access to credits compared with the private sector. The bond market developed only recently. Most important developments in the Chinese bond market happened only since about 2015. China’s bond market is characterized by its relatively small size relative to its GDP, low turnover ratio, and low foreign ownership. The central government bond market, which is most important for the internationalization of the RMB, needs to be much further developed in order to the pave way for the RMB to serve as a significant reserve currency. The market capitalization of the stock market is small relative to the GDP of China. It is characterized by low fund-raising capacity, excessive government intervention, lack of transparency, capital controls, and other issues. The good news for the financial market is that market opening and integration with the rest of the world did not slow down in recent years.

This chapter introduces a novel measure of credit regime permissiveness for seventeen OECD countries spanning the period from 2000 to 2017. It estimates country-specific credit regime permissiveness scores based on six empirical indicators that capture the breadth and scope of financial markets, the allocation of credit between households and businesses, and supporting regulatory and fiscal policy choices using principal component analysis. The Anglo-Saxon economies, the Netherlands, as well as Denmark and Sweden have the most permissive credit regimes, providing households with easy access to credit. By contrast, Southern Europe, Germany, and Austria have the most restrictive credit regimes, making it more difficult for people to take out loans. Credit regimes determine how easily households can borrow money and help shape the distribution of debt across and within countries. The chapter discusses in detail the institutional and policy features of the Danish, American, and German credit regimes. It concludes by documenting considerable variation in households’ coping mechanisms and their likelihood to go into debt to address unexpected income losses. More generally, households only borrow money to compensate for weak unemployment insurance generosity when credit regimes are permissive.