How do we put banking back into banks?

I spend a good part of my working day reading – about banks and banking. It is part of what I do; and the reading part is the way that I try to keep up-to-date with current developments across the globe.

What has come up persistently over the past decade in all that is written about banks and banking is one simple fact. No one seems to know what banking is about anymore!

Banks have now become mystical godlike beings hiding behind a veil of “too-big-to-fail” mumbo jumbo.  Just take Europe. The frantic efforts by a bunch of misguided EU politicians, that we have been witnessing these past few years, to save the big European banks from their own faulty business decisions is now threatening to rend individual societies asunder. Just look at the misery delivered to the average Greek man-and-woman-in-the-street who suddenly find themselves jobless and homeless not to mention the recent social unrest in that country. And there are other European countries waiting in the wings to be next on this score too.

This is not a uniquely European malaise either. American politicians are not immune to this type of madness.  

Banks seem to have become so besotted with issues like turning a profit (which ALWAYS has to be bigger than the last profit), or paying its CEO an obscene bonus (the norm seems to be “the worse the CEO’s performance, the bigger the bonus”), or worse still, paying minions of traders astronomical salaries and even bigger bonuses because somehow these “geniuses” are so talented and so irreplaceable that the bank would collapse without them.

What everyone has forgotten is what a bank really is.

The core characterization of a bank is an organization that takes deposits from folk who have a “money surplus” and lends these funds to folk who have a “money deficit”. In short; “depositors” and “borrowers”. The payment system came about as a by-product to this “deposit/loan” cycle.

Paying interest for deposits; collecting interest on loans (with a good dollop of sound credit risk management thrown in); collecting fees on other services (like payments), is what banking should be about. And at the end of the day if these core principles are applied judiciously there should  be reasonable happiness all round – depositors, borrowers, bank shareholders.

Of course this situation no longer exists. Witness the scores of small sound creditworthy businesses that have gone to the wall for the sake of a working capital loan, or customers ripped off with exorbitant fees imposed for the shoddiest of services. What about interest on deposits? Interest? You must be joking! Miss-sold products that the banks themselves don’t even understand. Or defective financial products that don’t work or bank “traders” speculating (some say gambling) with the “bank’s” own funds?

Isn’t it time that banking was put back into banks? 

How do we do this? Shareholder and investor activism? Depositor revolts? Borrower boycotts?

What do you think?