….and decently bury the old
In this week’s FT Money (25/26 January) , Merryn Somerset Webb, editor-in-chief, has some interesting remarks on banking. She points out that customers have new, and often better, ways to borrow than “via the traditional fleecing machines with their pricey real estate and unreliable IT systems”. There are new entrants to the market, and peer-to-peer lenders such as Zopla. Is it “all but over for conventional banks”? Look at M-pesa, the branchless banking system that serves millions of people in Africa and the excitement about Bitcoin. Banking is in decline – a ‘no-growth’ market:
“The banks are behind the curve, and governments obsess endlessly about regulating them, punishing them and breaking them up. That doesn’t add up to a growth sector. It looks like a sector in slow liquidation”.
Except, I would add, that governments everywhere love banks – otherwise why prop them up at such mind-boggling cost?
Don’t get me wrong. I wouldn’t have spent much of the past 40 years editing banking journals if I hated bankers. Not at all. I have known many fine, honourable bankers. But they lost the plot when they all got infected with the mad marketing, cash-is-king craze and aggrandisement fever.
Others encouraging a shake-up of banking include Martin Vander Weyer – son of Eric Vander Weyer, an eminent Barclays banker whom I used to know – in The Spectator – and Andrew Haldane of the Bank of England.
“Out of the furnace of the financial crisis a new banking model appears to be being forged”, said Haldane in The Spectator of 2 November, 2013.
“This is part reformation of the old, part revolution of the new”.
Banking is at bottom a market for information. In other industries, such as music, advertising, publishing and sales, information technology has had a dramatic effect on the middleman. Think Amazon, Google and eBay. This revolution is now, Haldane says, sweeping through banking – for example, in such a field as making payments. New peer-to-peer entrants have emerged in most sectors of banking. These offer hope that, at last, the “financing gaps” identified as far back as the 1930s for SMEs might be “durably closed”. Existing institutional investors are also getting in on the act.
As long as people in positions of authority like Andrew Haldane do their best to remove obstacles to the growth of such new forms of finance, there is hope.
In The Money Trap, I suggested that the list of global systemically important banks – the so-called G-SIFIs – should be seen as a list of institutions headed for the scrap heap. Like The Fighting Temeraire, a much-loved picture by Turner of an old sailing ship being towed to the break-up yard by an ugly, squat, steam-powered tug, such sprawling giants should have had their day. Since I wrote this, further scandals have vividly demonstrated that they are too big to manage.
The financial crisis came after a long period during which the best brains in academia, central banking, the BIS and the banks themselves tussled with the myriad of problems involved in making banking reasonably safe. A huge amount of intellectual effort went into it – yes, there was lobbying also, but it is superficial to see this as the case of the ruin. To my mind, the crisis showed it was an illusion to believe that banking on the traditional model could in future be organised in a way that did not impose intolerable costs on society. The search for a radical solution, for doing without banks as we have known them, remains desperately urgent. it looks as if the markets may be pushing in the right direction. For all the worries about the risks of shadow banking, it is essential that regulators do not place any unnecessary barriers to this development. Of course, like adjustment in the eurozone (see accompanying story), it will all take time. But the stress tests in Europe will be an important stage. The ECB must at all costs avoid the risk of becoming a cover for protecting old banking groups that have had their day.
“The world can manage without banks as we have known them, especially if money itself were put on a new basis … and re-connected to the real world” (The Money Trap.p 264).
PS By the way, the most devastating analysis I have read on the bitcoin is by Warren Coats, posted here two days ago. He concludes as follows:
“My expectation is that it will never achieve importance and that it is likely to vanish all together, giving way to more robust means of payment of more stable mediums of exchange. However, it deserves the chance to compete.”