Why do we need private banks at all? | 133 comments (133 topical, editorial, 0 hidden)

Re: Why do we need private banks at all? (none / 1)

One problem is that the deposits are not allocated well. Banks have enormous amounts of capital to manage, thanks to government guarantees, and extract a lot of fees from those deposits and then lend in destructive ways. If German and US can't think of anything better to do with capital than speculate on bonds of nations that obviously will not be able to pay back or US mortgages, then perhaps there should be alternatives.

I'm not proposing outlawing private banking, just providing a baseline safe government alternative.

by rootless2 on Tue Feb 28th, 2012 at 02:26:23 PM EST
[ Parent ]

Re: Why do we need private banks at all? (4.00 / 3)

There is some truth to that, but deposits from savers make up a really insignificant part of the capital from which banks are able to extend credit. Deposits are really now effectively divorced from lending and banks provide for deposits mostly just as a service to customers who want to preserve liquid savings, hence the higher fees for providing that service today.

The capital that supports lending comes from large capital market operations, such as selling bank stock, bonds, or other securities to finance lending. In modern capital markets, banks don't need depositors at all, because they can get all the capital they need from very large investors. The only reason banks have depositors is because governments force them to do so to gain some of the legal and regulatory advantages of being a bank. For example, Goldman Sachs became a deposit-taking bank in order to benefit from Fed bailout funds during this past crisis.

by santiago on Tue Feb 28th, 2012 at 03:01:00 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 0)

Goldman Sachs became a depository bank in order to get access to the Fed Credit window and to get a base of insured deposits that would shore up its equity.

Goldman Sachs said that over the past several weeks it began discussions with the Fed regarding the possibility of becoming a bank holding company. "We understand that the market views oversight by the Federal Reserve and the ability to source insured bank deposits as providing a greater degree of safety and soundness," the company said in a statement.

http://www.npr.org/templates/story/story.php?storyId=94894707

So now, with access to the Fed loans in hand and ability to offer government insured deposits GS moves to increase its deposit base.

Unlike most of its competitors, Goldman Sachs (GS) does not have a deposit base or retail branches, making it vulnerable to liquidity risk. JPMorgan (JPM) for example has a vast pool of overnight and term deposits (both retail and institutional) they can access during tight liquidity periods. Goldman however tends to rely on capital markets for funding, forcing it not only pay higher financing rates, but making its funding costs extremely volatile, translating into unstable earnings and high stock volatility.

http://seekingalpha.com/article/313522-goldman-taps-the-wholesale-funding-market

So what is it doing? Selling insured Certificates of Deposit.

by rootless2 on Tue Feb 28th, 2012 at 05:40:27 PM EST
[ Parent ]

Re: Why do we need private banks at all? (none / 1)

A rough picture: Here's the total loans and investments of commercial banks in the US vs some measures and parameters of deposits:
http://research.stlouisfed.org/fred2/graph/?g=5nE

Although there is correlation on a broad level between savings amounts and loan amounts, there is actually very little, if any, apparent correlation between changes in total savings levels at banks in the US and changes in total loans provided by those banks in the US. This picture is consistent with deposit functions of banks and lending functions of banks being independent services and not having much to do with one another. Deposits have increased since Great Recession started in the US, while loans have stagnated. The problem with banks is not in their deposit taking functions, but in their lending functions. Namely, it makes little sense for banks to lend money when default risks are high and when they can make more certain income by just taking fees from providing the service that people really want in a crisis -- saving their wealth.

by santiago on Wed Feb 29th, 2012 at 05:31:57 PM EST
[ Parent ]

large investors (none / 0)

Many of the large investors are managers of OPM who aggregate many small deposits and/or retirement accounts. The purchasers of the worst CDOs included a lot of German banks who took the money from the deposits of their savings and corporate depositors and invested them in trash marked by GS or, worse, in the case of DB, their own subsidiaries.

I think it would also be useful of those accounts could find a safe home outside the banking system.

by rootless2 on Tue Feb 28th, 2012 at 06:08:42 PM EST
[ Parent ]

Why do we need private banks at all? | 133 comments (133 topical, 0 editorial, 0 hidden)

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