What is Replacing Traditional Banking?

The economy of the world is changing. In 2008 the banking system came close to collapse because the banks had leveraged their deposits and forgotten that when times gets bad, leverage wipes out assets when times are bad just as effectively as leverage makes money when times are good. The banks were too big to fail, because they would have lost people’s deposits if they were put into insolvency. Most businesses are too small to matter, if they go broke, but this was not the case with the banks.

Across the world governments have imposed restrictions on banks. They have to be more prudent with their lending, they must not leverage to the extent that they previously did, they must hold more back in reserves and generally behave more prudently.

These new rules have caused two effects quite apart from making the banks behave. They have concentrated capital in the hands of the people who already have capital, and made it difficult for people to borrow capital for business, simply because the banks do not have the capital available. They set up rules about borrowing which are designed to restrict lending rather than to ensure prudent lending.

In these circumstances there are now new businesses and growing businesses which take deposits and make loans in different ways from the ways that banks have traditionally done this. Most of these new businesses use the internet, but that is simply their means of finding customers, rather than their modus operandi. They promote things like peer to peer lending, matching bargains, and raising capital through crowd funding. Thus they are gradually filling the various gaps that the banks have left as a result of having to meet new regulations.

These new businesses will no doubt grow, merge, and may eventually become as successful as the banks were. There is less risk to the economy by a failure of one of these new businesses, because generally they act as brokers between individuals and companies rather than as principals in the way that banks operated.

No doubt there will be scandals, misrepresentations and frauds- these are inevitable in every field of human business conduct, but for now and for me at least, they seem less dangerous than cartels of banks which have dominated these activities.

One Response

  1. I think there is another and much more important aspect of the changing financial world.

    ‘Money’ ( i.e pounds, dollars, euros etc) is being seriously and continuously devalued by the excessive money creation activities of central banks/governments.

    Already, physical coinage/notes are regarded as more secure than numbers on a bank’s website. There has been a massive run of cash withdrawals in Greece in the last few weeks. Soon it will be stopped, a la Cyprus.

    The proportion of physical cash in most economies is around 10% of the notional available money. In the last 10 years creation of the UK’s notional amount of money has outstripped the creation of cash by 3:1.

    So, the BOE is slowly reducing the availability of cash, yoy. We are being pushed into a cashless society. Some bankers are openly promoting the elimination of cash.

    In my view. we are witnessing a reversal of the meaning of the old adage that a good prospect was ‘money in the bank’ Money in the bank is at risk of sudden revaluation, transfers to shares, website glitches/hacking and downright theft.

    Countries like Denmark and Switzerland have begun a regime of charging or taxing deposits in their own currency simply because of the massive transfers from euros which is being devalued daily and is in danger of sudden revaluation.

    Of course cash is at best a piece of paper but unlilke a bank deposit it is guaranteed by a government rather than a giant ponzi/money laundering empire.

    So many people are now avoiding banks because their only commodity is a ‘rip off’ type debt or slow theft and deposits attract more risk than cash.

    China Russia and India have long since given up on the west’s banks. They are hoarding gold, silver, plutonium, lithium etc etc, not to speculate (as the west’s banks do) but to accumulate.

    What peer to peer lending and crowd funding needs is another method of accumulating or transfering value/wealth. Bitcoin has been touted but I would rather trust, say, a couple of gold sovereigns.

    Plus ca change

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