The Telos Of Banking

Noah Millman asks what banks are for:

The classic function of a bank is to turn savings into capital. They borrow from the public in the form of insured deposits. They then deploy this capital in the form of loans of various kinds. Their job, in other words, was to evaluate and hold risk – the risk of those loans. And for taking that risk, they earned a return.

But in the world we actually live in, banks have labored to make themselves appear to be service businesses that earn fees rather than risk-taking businesses.

Indeed, risk is a bad word – and remains a bad word with the financial reformers. The new job of banks, say both the banks themselves and their regulators, is to be financial intermediaries. They don’t lend money against a house as collateral; they intermediate between a mortgage borrower and an investor in a mortgage-backed security. They don’t lend money to a business; they intermediate between a company looking to borrow money and an investor in a collateralized loan security. They don’t even take deposits; rather, the intermediate between short-term corporate borrowers and investors looking for near-cash instruments. And of course they intermediate between the various participants, hedgers and speculators, in the wide variety of over-the-counter derivatives markets.

The rest of the post is a really astute look at how this transition explains the financial crisis. The short version of Millman's conclusion: he thinks banks should return to their traditional role, and the recent financial reform doubles down on their new role.