Banks, Markets, and the Real Economy

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ABSTRACT

The irreversible crisis of the prevailing business model and system governance.

In modern economies, commercial banks have distorted their original corporate mission based on the process of credit auto-generation, the engine of the disbursement of typical loans and the formation of deposits.

In fact, the public finds it convenient to acquire bank liabilities in its financial portfolio, usually in the form of deposits, because they are assets with no content or degree of risk.

But the banks, encouraged by the dominant attitude of the supervisory bodies and by the government compliance policies, have changed the core business, assigning an increasingly central role to market financing activities, i.e. holding securities and other derivative instruments in order to generate non-interest income based on short-term price differences related to frequent market fluctuations. It is generally assumed that the financing of securities involves fewer risks than traditional loans, thus leading to a process of transformation of risks, maturities and liquidity, yet the attentive researcher is well aware that operations on today’s financial markets are characterized by the assumption of increasing and sometimes totally unpredictable risks, due to three main circumstances: a) the increase in price volatility; b) the presence of widespread asymmetries in information; c) the functioning of intermediaries in domain positions likely to modify the correct pricing.

Hence some undesirable consequences:

  1. An increasing risk in banking management, with the transfer of significant risks to deposits and, in any case, well beyond those perceived by the public of depositors; the latter receiving in return almost no remuneration for the increase in risks and the “artificial” liquidity of deposits.
  2. A substantial quota of the credit stock to the economic system due to the diversion of resources from collection to speculative financing activities and for inadequate sizing of the solvency ratio, taking into account the increased risks assumed and the insufficient allocation of patrimonial resources.
  3. A reduction in the pace of development of the national product, driven by the severe shortage of financing, mainly for small businesses, due to their dependence on bank credit, linked to increasing barriers to access the securities sector in the financial market.

This undesirable situation, widespread in all advanced economy countries, contrasts with the principles of economic democracy and the individual freedom of citizens, transferring improperly to commercial banks an increasing power which very often has a negative impact on the fate of nations’ development and on the conditions of peoples’ economic well-being; objectives and principles totally ignored, since the sole and main objective of credit institutions is to maximize the profits of shareholders and managers, in total contrast to the public interest inherent in their activities, with the negligence of governments and the complicity of the supervisory authorities.

KEYWORDS: credit intermediation; market finance; banking risks; credits and deposits; adverse selection; capital shortage; agency costs; public interest relevance.

About Author

David Yerushalmi is a long-time scholar of anthropology and models for the development of human societies. For this reason he has dedicated an important part of his research to economic science, in the awareness that the availability of resources useful for the survival of the race sets the conditions for the moral, civil and technological progress of Humanity. He currently studies and works in Israel.

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