25 November 2010

Banking Would Be Boring Business If...

Banking would be a boring business that attracts boring people if it were not possible to:
  • play important role in the fates of many companies and households;
  • restructure and refinance loans in a way that interest payments are either added to the principal amount (i.e. capitalised) or paid from the additionally granted loan amounts, and in this way accumulate profits, postpone losses and increase short-term profits;
  • enforce personal guarantees and collateral agreements when defaults happen, which enables to minimise losses and over time get relatively bigger when compared to the rest of economy;
  • fund risky business and “casino banking” with depositors’ money, and get subsidised via deposit guarantee systems;
  • expand internationally in order to take advantage of regulatory arbitrage, charge higher margins from less developed countries, optimise taxes etc;
  • use extremely high leverage by justifying it with sophisticated risk management and –control systems and advanced approaches;
  • introduce new instruments and creative structures that enable even higher leverage and speeding up money creation process;
  • put pressure on regulatory authorities by stressing that this or that proposed regulation would decrease availability of credit or increase its price, and thus be harmful for the economy (which, by the way, is true at the current state of affairs);
  • attract talents by offering interesting job, more money and more power.
    What do I mean by “boring business”? I mean that the results for the banking system as a whole would be very much up to central banks, more precisely, up to their decisions on money supply. Within the limits set by central banks and complemented by other regulators, something similar to the zero-sum game had to be played. Profits of the banking system as a whole would be bound to conform to the changes in monetary base, which among others would mean low and unattractive return on equity. Any earnings more than that would be “eaten” by credit impairment losses. Similar applies to the size of banks’ assets: they could only increase with the same pace as money supplied by central banks.

    Banking is not a boring business. All the above listed opportunities and more are available.

    No comments:

    Post a Comment