Boring Banking Not The Answer


Boring Banking Not The Answer

2 billion trading loss. Out with the reckless 20-somethings making millions and back to the safe but boring 3-6-3 business model: Pay depositors 3% interest, lend at 6%, pocket the difference and hit the golf course by 3 p.m. The idea that dull-equals-safe springs from a misconception about what banks do. Banking, by its nature, is a dangerous effort. Even the most plain-vanilla banks extend credit and hope to get repaid in the unknowable future.

It’s a dicey business and always has been. What’s more, to re-create the bank industry of the postwar age is a nonstarter. Banks grew along with American companies as they diversified, spanned the country, branched out and turned to arcane financial tools to manage their affairs overseas. U.S. banks kept pace, culminating in the lifting in 1999 of the Depression-era restrictions of the Glass-Steagall Act, which had separated commercial banking institutions using their securities businesses.

It is this separation that former Harvard Law School professor and Democratic U.S. Senate applicant Elizabeth Warren, amongst others, wish to see restored in the fact that it was deficits from investment bank that activated the financial meltdown. Yet the bulk of the loss for banks through the financial crisis originated from lending, much of it linked with residential real property. The biggest failures – Wachovia, Washington Mutual and IndyMac – were the result of uninteresting bank.

They misjudged the housing market, let’s assume that real property prices would permanently rise. They made way too many loans that borrowers couldn’t repay and didn’t charge enough to compensate for the risks. They went bust the same way banks have since forever. Bankers, like everyone else almost, got swept up in what ended up being a gigantic credit bubble. When it went bust, losses from bad loans overwhelmed bank or investment company capital. This will be of no real surprise to anyone. OK, investment bank wasn’t blameless in the financial crisis.

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Banks’ securities operations helped kick the meltdown into high gear by constructing securities and writing derivatives agreements that nobody could understand. Just as indefensible were investments made out of money backstopped by the taxpayer-guaranteed federal deposit insurance finance. 2 billion trading reduction, would be barred by the Volcker guideline provisions of the Dodd-Frank Act of 2010, which has yet to be fully implemented. Misjudging risk is exactly what imperils a bank, whether through making bad loans or money-losing trades. Well-crafted rules and vigilant enforcement can help, though regulators are as likely as bankers to miss excessive risk-taking or drop their guard when industry lobbyists whine.

Bankers would surely resist being confined again to the unglamorous part of the business enterprise, declaring that they can’t make income comparable to those in investment banking. This was part of the rationale for closing Glass-Steagall in the first place. As appealing as it might sound, a measure as draconian as a fresh Glass-Steagall isn’t to be able.