A Banker’s Note: Are the roles of banks changing?

1 July 2020, by Piet Nieman

All facets of banking are constantly redefined and some of the key roles banks have fulfilled are either disappearing or lost its effectiveness.

One key function of banks was to facilitate the fusing of unproductive capital with productive opportunities. There are other market mechanisms that also fulfil this role, but the following were factors that specifically could be attributed to banks:

• Low risk profile for investor of surplus cash and mostly backed by security instruments.
• Cash returns on a frequent basis for such investors.
• Structured process of linking capital suppliers with capital demand.
• Automatic diversified risk, as capital suppliers does not have single exposure, but rather exposure to total lending.
• Capital demand received capital, without entertaining interference in business activity or strategic decision making.

Two factors in the recent past influenced this functionality:

• Reckless lending by a small portion of the international banking industry, which led to very restrictive and often impossible regulations as described in the different phases of the Basel Codes.
• Financing of terrorist activities through established banking platforms.

Both these events have influenced the traditionally conservative and sustainable profile of the historically safe banking environment. This turn of events required action, but some of the measures that were taken resulted in the baby thrown out with the bath water.

Today a large portion of the investment public, specifically pensioners and people that need to survive on the returns of their investments, have nowhere to go. Wealth managers have developed plans whereby people’s capital funds are utilized over a period, which is determined by the projected lifespan of such a person. If that person outlives that period, he or she will find themselves in a predicament.

Although the redefinition of the banking role is not the sole factor for this predicament, it has a definitive role. From a social responsibility perspective, it is unforgivable.
Regulators unfortunately have failed the large portion of investors that needs to earn returns from their capital, without depleting the capital base. Banks are still well positioned to fulfil this role, but unfortunately (as per in other sectors of the economy) the powers in charge rather shy away from making a difference, than take the bull by the horns and address the problem, which is actually a huge opportunity.

Surplus capital in the marketplace needs to be married with productive opportunities and if the banking sector steps up to the challenge, it may become the strategic role player it once was. But then the politically driven regulators will have to join the party and utilize the banking mechanism as a driving force for development and growth. Currently they were able to kill the golden goose and the result is that people are saving themselves poor.
As no surprise, the banking industry is in negative interest rates territory and the role it once fulfilled has now been taken over by the larger owners of cash surpluses, which enhance the inequality that has become a topic of interest for many political debates internationally.

In short: if the banks do not enable the owners of small portions of surplus cash to benefit from productive investment opportunities, the owners of large portions of surplus cash will take all the benefit and global inequality will increase.