The Relevance of Financial Theory in the Modern Era in the Banking Sector

Abstrak

This study aims to re-analyze the relevance of classical and modern financial theories in the current banking industry, evaluate their suitability in the context of digitalization, and present a synthesis of the empirical literature on the modern banking sector. The research method uses a narrative review approach  with data sources in the form of reputable international journals, SINTA national journals, industry reports, and literature reviews from international institutions. The analysis is conducted through thematic analysis and comparative review to map the development of concepts and the empirical evidence that supports or refutes financial theory. The results show that classical theories such as Modigliani-Miller, CAPM, and the Efficient Market Hypothesis (EMH) still have relevance, but are limited in explaining digital risk dynamics, managerial behaviour, and new competition structures in the banking industry. Modern theories such as behavioural finance, asymmetric information, market microstructure, and financial innovation theory are better able to describe the phenomenon of digital banking, big data-based credit scoring, cyber risk, and changes in banking business models. Empirical findings suggest a paradigm shift from traditional risk-based linear theory to data- and behaviour-based risk analysis models, with an increasing role for algorithms and machine learning in credit risk mitigation. This study recommends integrating classical financial theory with technological and behavioural approaches to develop a theoretical framework that is better adapted to digital developments. In addition, the study's results contribute to practitioners, regulators, and academics’ understanding of the direction of financial theory's evolution and its implications for the stability of the modern banking system.