The Changing Nature of Banking and Why it Matters
Chapter in Buckley, Avgouleas & Arner (eds), Rethinking Global Finance and Its Regulation (Cambridge University Press, New York, 2016)
18 Pages Posted: 11 Oct 2016
Date Written: June 1, 2016
Banks have been a ubiquitous feature of almost all successful civilisations. Organisations discharging early banking functions operated in ancient Babylon, and gained much greater sophistication in ancient Greece and Rome.
When asked what they understand a bank to be, most people describe an institution that accepts deposits and makes loans ― what we generally understand as a ‘retail’ bank.
However, the banks at the centre of our global financial system are utterly different. Entities such as JP Morgan Chase, UBS or Deutsche Bank do a great deal more than take deposits and grant loans.
Prior to the 1970’s bankers were prudent, deeply cautious people who gave advice predicated on a good knowledge of the needs and interests of the customer. Bank managers tended to have real authority as banks were quite decentralised organisations, and thus bank managers tended to be highly respected members of their local communities.
These days are long gone. Most branches in my country, Australia, no longer have a full-time manager. Most Australians, at least the more sophisticated ones, understand that when a bank employee recommends a certain investment, they are typically incentivised by a commission to do so. Banks have changed from a relatively local institution working in the client’s interests, to a far more complex organisation that is intent on maximising profits and the number of products it can sell to customers.
This change has been so dramatic that many of the world’s largest and best-known banks are barely recognisable from the organisations they were in the 1970’s, let alone their ancient forebears. The implications of those changes are profound, especially if we think of the economic consequences of the allocation of much of our most talented human capital away from high value-added roles in the real economy to the banking sector.
This chapter will seek to explore the full dimensions of this transformation and analyse why it matters for how we think about banks today, and the regulations we pass to govern them.
The chapter is in four further parts. First, it identifies the major changes that have occurred in banking over the past 40 years. Second, it analyses why banks exist ― their core purposes. Third, it explores the implications of these major changes, in particular, as to how we should think about banks. And, finally, it concludes by suggesting that drawing a sharper distinction between a traditional bank and the new type of super-bank may be really useful for policy and public discussion.
Keywords: Banks, Banking, Banking Industry, Change, Local Branches, Global Financial Systems, Retail Banks
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