17 July 2018
Stanley Epstein
Stanley Epstein

Stanley Epstein

Stanley Epstein - Citadel Advantage Ltd

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How do we put banking back into banks?

29 April 2012  |  2757 views  |  1

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?

Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 02 May, 2012, 13:24

The last five years of gloom has come on the back of the previous five to seven years of boom. Just taking real estate as one example, it's evident that the man on the street benefited as much from the boom as he is suffering during the gloom. As far as I know, not a single American bank has been charged with any criminal wrongdoing, so I won't blame banks singularly for what happened during the GFC. While their bonuses might seem oversized to a common man, they were not hidden from their shareholders. Going by the recent rejection of Vikram Pandit's compensation package by Citi's shareholders, it looks like shareholders have finally woken up.

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Stanley is a Director and co-founder of Citadel Advantage Ltd., an international consultancy to the financial services industry that provides specialist services and training in the areas of operation...

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