Once controlled for too-big-to-fail (TBTF) status, banks no longer benefit from economies of scale (Davies and Tracey 2014). How digital innovations affect productivity in banking crucially depends on changes in the competitive structure of markets. As in other industries, the entry of new, more productive firms and the exit of incumbent, less productive firms, can be a channel for improvements in productivity.
This process of “creative destruction” is, however, constrained by the fact that financial institutions which are being restructured or are eventually resolved may pose threats to financial stability. Dynamics of entry and exit thus differ across banks and non-financial institutions: in the event of insolvency, liabilities of non-financial firms can be frozen, and the firm can be gradually restructured and, possibly, resolved.