The essence of banking?

There is a lot of talk today following Lord Turner’s comments on future regulation of the financial services industry and the Bank of England’s view of separating ‘retail’ and ‘casino’ functions of banks which are serving to cloud rather than clarify the picture ahead.

As Andy Burnham put forward in a recent article for Prospect, can a philosophical perspective cut [through] the crap? (although in true New Labour style he characterized such a perspective in terms of appointing a philosophical ‘quango’ with a ‘Chief Philosophical Officer’ – let’s not pursue the metaphysical contradictions that entails…..).

A philosophical approach to understanding "banking" would come down to a simple question. Do we better define ‘banking’ in terms of the institutions and methods of making money or in terms of banking as a social and cultural practice? Just as the philosophy of science has shifted from understanding method to understanding science as practice, so it is useful to look at the activities of banks, bankers and banking in more subjective/

phenomenological, less empirical, terms.

For a start, the retail / casino categories don’t really hold water. The idea that ‘retail’ is somehow an essential activity of banking is born from a rather conservative and historically minded belief in banks being solid buildings with nice /nasty bank managers running them. These managers and branches were literal "pillars" of their local community. In today’s virtual and connected world such a conception of ‘what banking is’, is as short sighted as it is anachronistic. The generation who create trust out of such expensive, localized and fundamentally illusory experiences are no longer the people whose economic and cultural activity needs to be harnessed (although they do have a lot of votes…). Saying that we need ‘retail’ banks for money to function is a bit like saying we need supermarkets to eat. Just look at the roots of the names of Banks – Midland, NatWest, of Scotland etc – they are institutions of an age before communications and networks. Why not take this opportunity to create the ‘Bank of Facebook or Myspace?’ – or perhaps Facebook already have? Or is it called zopa? : )

The benefit of 'breaking up' banks would not be to limit their functions, but instead make them more responsive to the communities in which they operate, less industrial monoliths, perhaps more like local 'organic' farmers?

The utility of banks are the systems which we rely on to exchange, store and account for our money (and they are often slow to innovate) such as payments/transfers, accessibility to account information, security of that information etc and their ability to offer credit. They aren’t storing anything of ‘value’ in their branches any more beyond the electronic data which makes or breaks their customers’ wealth. Just look at the new branch designs – they are dominated by cash machines, leaflets and sales people. Not a safe door in sight! Interestingly, if ‘retail’ is the essence of banking, then why aren’t the FSA having round table talks with the likes of Moneysupermarket, Comparethemeerkat (sic), and the like, to define the future of retail banking?

Which brings us to casinos. If all banks really were casinos we wouldn’t have had the crash. Unfortunately, banks are the gamblers in the casino and as such betray many of the traits of gamblers in any other context; such as betting shops. The gamblers I have researched and experienced tend to have a rather "liquid modern" view of what money is. Money comes and it goes, you spend it before it disappears. Strangely it is not the money you win which makes you gamble but the thrill of the win itself – of proving myself right and able to predict the future in some small way that other people can’t. This visceral enjoyment of competition becomes everything and end result is lost in the desire for more competition. As a result, a win will often be lost very quickly on a series of ill considered bets made purely on the basis that ‘I am having a lucky day’. Sound familiar? Welcome to the betting bubble.

The only winners in the crunch were the guys who were actually running the casino – the market makers of Barclays Capital perhaps – who supplied the ‘races’ in which banks with less expertise or vision decided they could pick a winner. As it was the suppliers of the products these gamblers played with were always going to win and they had very little interest in which of their punters won or lost as long as they kept creaming off a margin as the bookie/ casino owner.

So talk of all this talk of breaking up banks and ‘regulating’ the risky practices of individual traders is rather like bookies saying that they will only provide sure bets in their betting shops and will tell the gamblers in the casino about the dangers of gambling (the other thing they get their thrill from; the real emotional excitement caused by the fear of losing actual money).

Lord Turner wants banks to do things which are ‘useful’ to the economy and society as a whole. In my experience, this isn’t a question of bankers being given lots of rules about what constitutes ‘risk’ and ‘reward’,  it is about engaging the people inside banks with what their customers are trying to achieve with their money. Only in this way will they prove their worth by creating the new forms of credit, capital and money which we need to create a more sustainable economy and perhaps fairer society.

Comments

[Thomas Barker]

I think it's more that the BoE would take a legalistic view that currency should only be put into circulation against very liquid, very certain collateral, as decided by definite criteria. They'd perceive the risk as detaching the amount of money in circulation from the amount of goods/services on sales. To them, banks are subsiduaries that need watching.

The FSA is happy is if the projected future cashflows look safe relative the liabilities. They would perceive this as an accounting issue. Setting out criteria for how the flows are generated would be considered regulatory meddling.

[Bruce Davis]

It seems that Merv King agrees with you - his seems to be calling for reform of the banks not more regulatory meddling. Perhaps we can continue this conversation at the CSFI event on the 29th!?