For a long time I suffered from the erroneous belief that when you deposited money in a bank, the bank would keep it for you and even pay you a bit of interest. In other words, the bank was keeping the depositor’s money for him; it remained the property of the depositor.
This is of course incorrect. Once deposited the money becomes the property of the bank for it to use to satisfy regulatory requirements, and in turn the bank owes the depositor the amount of money deposited.
Thus a “run on the bank” would be catastrophic because the bank would not have sufficient money in its vaults to pay all depositors what it owed them, at which point the central bank would have to step in to mount a rescue through a limited deposit insurance scheme.
When banks lend money they are, in effect, lending money that they do not possess, but of course that does not prevent them charging the borrower interest, and in the Philippines at astronomical rates – 3 percent or 4 percent per month on credit card balances, for example — which payments go towards supporting profligate business styles, “top dollar” offices, highly paid senior management, fat expensive business lunches and the development of computerized derivatives and other trading systems that many in senior management simply don’t understand.
So this takes me back to the original purpose of moneylenders, which was to take deposits from Party A and loan these with interest to Party B — who is considered creditworthy — for use in some commercial undertaking or other, which would most likely provide jobs for people in making things that could be sold to those who could afford them or exported to other markets where people had enough wherewithal to buy them.
But it all got out of hand. From simple small banks that took money from A and loaned it to B they have amalgamated and grown bigger: Citibank with 240,000 employees and 20 million client accounts represented in 160 countries, or HSBC with 266,000 employees and operations throughout the world. In the Philippines there are BDO, Metrobank, BPI, RCBC, PNB and about six or 700 other banks of various shapes and sizes. Their prime objective, it seems, is to make money for themselves, to deliver “shareholder value.”
In my view it should be no surprise that a nation ranked 119 out of 187 countries on a GDP/capita basis (less than half that of Thailand or 25 percent that of Malaysia) hosts 3 of the planet’s 10 biggest shopping malls or that Metro Manila has the worst traffic in the world. And whilst national infrastructure is renowned as grossly under-developed and unemployment is at about 25 percent. I put it down to the way in which Philippine banks lend money (that they don’t actually have).
They will lend to buy a car or a house or give you a credit card and that is about the extent of their lending scope. So everybody gets a car or two to jam up the roads and most get several credit cards to use in the endless number of shopping malls.
And as if that is not enough the numbers can be interpreted to make the economy look good – “consumer confidence is up” and “look at the increased wealth of Filipinos with car sales numbers going through the roof”!
But the banks are not very good at lending for business and real sustainable domestic economic development. Business loans are all about collateral and if you don’t have three or four times the loan amount in “hard collateral” (developed real estate, preferably in Metro Manila) as well as a few guarantees of one sort or another then it’s unlikely that you will get the money. Even better if you happen to have cash as collateral, but then why would anybody provide that in order to get a loan?
I read a line in a book about major infrastructural development over the weekend that “there is no group of people on the planet who know less about project management than banks.” And this referred not just to banks in the Philippines.
Banks appear to have become internally focused on the mission to deliver shareholder value, i.e. making as much money as they can by whatever means, including at times illegalities (fixing the LIBOR rate, for example) and of course lending money that doesn’t in fact exist, all for themselves.
They have great difficulty lending for business and it must be assumed that in their ivory towers they just don’t have the knowledge to evaluate a business risk. Even if they actually took one, they would need to cover it three or four times with readily liquidable collateral in order to pay their own costs as well as those of their outrageously expensive professional advisors in the event of a default.
The question is how can governments, which we must at least — naively perhaps — assume are there to protect and give better lives for their citizens, ensure that lending by private sector banks matches national development needs? The answer is that they cannot. The banks are too big and too powerful and their regulation is a sham. Crowd-funding has started and is developing because banks will not lend to entrepreneurial initiatives. Share listing either through a full IPO or in one of the many new alternative markets has been the conventional way to avoid bank dependence. Expect more methods to be devised that allow investors and businesses to avoid the banks.
Bank lending policies need to be made to reflect the needs of national development and that means they need to lend primarily to business, which is why they were first set up. They don’t respond to a market through their lending policies, they determine the market whether we like it or not. I’d be in favor of nationalization within an honest and objective government environment — always provided that you could find one!
And to justify the title of this column, Vladimir Ilyich forecast 100 years ago that the banks would grow so big and monopolistic that they would control capitalists in the world’s economy “by restricting or enlarging, facilitating or hindering credits, and finally to entirely determine their fate, determine their income, deprive them of capital, or permit them to increase their capital rapidly and to enormous dimensions” (“Banks and Their New Role”).
Mike can be contacted at firstname.lastname@example.org.