Tuesday, 14 January 2014

Banks are not fund managers

New post at Forbes

BANKS DO NOT LEND OUT DEPOSITS. They really don't. And they don't "invest" customers' money, or "keep it safe". They lend, and they use customers' money to fund that lending. And that's what we want them to do. 

Oh, and there's a little bit about that Libor rigging matter, too. 


  1. As a consumer, what I want a bank to do is to keep track of how much money I have, give me free access to the cash, and shift the numbers around when I make a BACS payment, direct debit, etc.

    As they have my money, I'd like them to make use of it to earn an income so they don't have to charge me for the stuff I want them to do.

    I also want there to be institutions I can borrow money from, and institutions I can put surplus funds in to earn an income. But these can be entirely separate operations; the only reason to lump them together, so far as I am concerned, is economies of scale.

    It's book-keeping compared to investment advice; warehousing as opposed to production; the manufacturing/wholesaling/retail/distribution/waste disposal chain; energy generation and the national grid. If you know how to handle clean water then getting into drainage and sewage disposal is probably a good strategic fit, but I personally can happily pay one firm for one set of pipes and another for the other - in fact in many ways I want the two to be kept as separate as possible... :-)

    That's from the street side of the counter. From the banker's side I imagine things look different.

    1. Andrew, this is a really helpful comment. Would you mind if I re-posted it at Forbes so it reaches a wider audience?

    2. Hi - sorry, got caught up in January filing deadlines and forgot to come back here. No, I don't mind at all. Glad you think it's useful :-)

  2. I like the distinction made here between the lending process & that of getting the funds to support that. I would be interested in your views on talk of the low level of bank lending to SMEs. I feel that's really about the low level of capital SMEs have compared to the costs of running their business. A small business with 20-30 staff might be spending 100k per month. If ebbs and flows of income mean they need an overdraft but how big does that have to be to be helpful? 250K? The same issue pops up if they think they see a market opportunity that needs up-front finance. How many SME's have 250k+ in assets to borrow against? If they do have assets like that someone will probably be telling them they should be leasing. This issue is known as the MacMillan gap, I believe. So I really don't know why the government is pressing the banks to lend more unless they themselves are prepared to carry the risk of unsecured loans. If they are I would ask why should society take that risk, because for sure if that SME turns out to be the next Amazon, floats or gets bought by Google getting the money back will be cold comfort compared to being a shareholder .. and governments don't pick winners anymore, do they?

  3. You suggest that the banks are making a hash of their lending. But if lending is the major or even sole purpose of their function then it is likely to be indiscriminate, short term, speculative to a fault and even predatory. Which is more or less what the situation is. But how do you take lending away from firms like this and who should deal with it? If it goes to political decisions and government agencies it will be even worse.