Banks don\’t matter all that much

A constant point of mine:

Their word is their bond but whose credit do you trust? A famous football club, an 800-year old university or the Treasury? All would like to borrow your money or tap your pension fund.

The University of Cambridge wants £400 million to finance property development, Manchester United wants twice as much to cut its debt and the Government is hoping to raise more than £200 billion to pay for everything from nurses’ salaries to new helicopters for the Army. At the same time, the corporate sector is throwing bonds about like confetti. Non-financial companies issued more than $1 trillion in bonds last year as businesses rushed to take advantage of cheaper money and easier terms in the global capital markets.

Various types (Will Hutton comes to mind) shout and scream that banks don\’t do enough to encourage long term lending and thus long term investing in the UK. Compared, for example, to his beloved Rhineland version of capitalism.

But the important point is that sure, banks don\’t do very much of this in the UK but this doesn\’t mean that such long term money isn\’t available. It\’s just that we do it in a different way. We use bond markets rather than banks.

Do note that this is a very rough sketch indeed, but Hutton\’s seeming desire is that banks haul in short and long term cash from depositors and then lend it out long term. The British (or Anglo-Saxon, as the US is similar) system is that banks haul in the short term cash and lend it long, yes, but we\’ve also a parallel market in bonds, where those with long term money lend it long directly via bonds. We\’ve also a short term market, in commercial paper, where you can lend to a company for 7, 14, 60 days and the like.

You can argue about which system is better, the intermediated version or the disintermediated. But to bang on about how banks don\’t do what they do in Germany without noting that we solve the same problem in a different manner is simply obtuse.

Thumbnail sketch: the credit markets in the Rhineland version are the banks. The Anglo-Saxon credit markets are the banks plus the bond markets*.

*A thumbnail sketch is even more of a near lunatic collapsing of a complex point to a catchphrase than a very rough sketch. For yes of course there are bonds and commercial paper in Germany and there\’s also a difference between equity and loan finance between the two systems.

5 thoughts on “Banks don\’t matter all that much”

  1. But bond holders lend money to strong existing companies, are cannot be strong armed into stumping up cash for the latest government boondoogle.

    Willy likes the German model because its so easy to corrupt.

  2. Agreed that banks are just middlemen.

    I don’t agree with the idea that banks collect savings and then lend them out.

    The Golden Rule is that borrowing creates deposits, not vice versa. Borrowers are customers, depositors are suppliers (whether or not you interpose a bank). Customers demand loans (or not, as the case may be) and, provided they are considered creditworthy*, supply of deposits or bonds automatically increases or decreases to match. Why wouldn’t they?

    * This is the most important variable. The credit markets have not ‘frozen’ in the slightest, what happened is not just that people want to borrow less in a recession, it was that people previously seen as creditworthy are no long so seen.

    By analogy, manufacturers of horse-drawn carriages did not go out of business because supplies of leather, wood, steel and rubber dried up; they went out of business because people bought cars instead.

  3. Other aspects of Rheinland capitalism includes wide ranging cross ownership of companies, which has not proved to be a stabilizing factor (see VW/Porsche) and a State owned banking system. It is exactly those State owned banks that have taken the worst hits the last two years including the Bavarian Landesbank which paid 1.6 billion Euros for a controlling interest in the HGAA bank, proceeded to lose another 3.75 Billion, then sold it back to the Austrian government for …….. 1 €.

    Give me some more of that Rheinland capitalism.

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