In May 1998, Fortune published an article, “Banking Is Necessary; Banks Are Not.” An interesting thought and given the events we have seen in the nearly 19 years since, we can see their reasoning and possibly can address it better now.
The full service financial institution was a growing idea then and even now you hear it discussed. Merrill Lynch, since absorbed by Bank of America, wanted four doors into their business. Insurance, investment, real estate and finally, banking and trust operations. With regulatory change over the time since, these amalgamations have come to be for all of the big banks.
And, not always to the benefit of everyone.
The changes were necessary according to the article because banking by itself, made no sense as a business. People had more ways to store their money than in the old days of the 1960s and 70s. Money market funds replaced savings accounts for example. Mortgage lending and car financing and commercial lending had moved away from banks to some extent. The future of traditional banking was bleak.
Banks are intermediaries and when transactions and money storage mattered most, they had a place. Since the article was written, transactional middle men have become even less relevant. Few people look to banks as repositories for their currently unneeded wealth. Lending is less of a banking issue than it once was. Banks make huge sums from service charges on transaction and providing accounts. Given the efficiency of the internet that is unlikely to continue to work as a profit center.
The 2008 financial disaster showed the flaw in applying old banking rules, guarantees and ideas to materially changed entities. When insurance, investing and financial underwriting were carried on by others, banks were immune to the mistakes others made. When all the risk was under one roof, not so much. And the governments responded as if banking remained as it had been 50 years earlier.
Did the bail-out lead to changes that matter? Not really. “Too big to fail” is a foolish idea when the essential part of the argument is that banks are crucial. The context is different now, just as it was in 2008. Unbundling matters.
What most of us think of as banks really are useless except as a storefront for activities few citizens understand or want. Most people do not want their deposits being used to fund leveraged, private equity deals in some remote country with weak laws and a dictator at the helm. Even lending to countries has risk.
Change continues. The internet and block-chain technology cannot be good for traditional banking. Neither is going away. Perhaps the banks will eventually disappear.
As investors and as customers, we need to understand what banks do. Follow that with what they should do to maintain our financial security, provide an efficient transaction service, and deliver personal lending services.
I am sure the new big banks are exciting to run and a very creative place to work for some of their people. At the same time, I think I would like my bank to incredibly boring. That may need to be supplied by something that is barely visible today.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772