Why banking needs to be treated as a public utility

State Bank of India

Photo by Anniekanwar

 

Public Banks have strong footholds around the world. In India they hold 70 percent market share. As global interests push to privatize India's Public Banks, a recent article in Economic Times argues that how we view the nature of banking is the central question — and how we answer it has direct relevance to banking in the US and globally.

“In simple terms, are banks meant to be turbo-charged return on equity (ROE) machines, driving innovation, risk-taking and high returns for shareholders? Or should they be public utilities meant to provide low-risk plumbing for the real economy, not blowing up, and if they do, not presenting catastrophic outcomes for society? The question has always been around banking, but the question has become centre-of-plate since the financial crisis in 2008. At the core is the realisation that banking losses, irrespective of the nature of ownership, is a public liability.”

“Higher capital requirements under Basel III, higher compliance requirements, stripping off risky parts of banking from universal banks – there has been a global attempt towards making banks closer to utilities than ever before. In short, convert TBTF to “Too Boring To Fail” from “Too Big To Fail”. In many ways, the impact is visible – with ROEs of banks globally more resembling utilities (5-9%) than banking in the previous decade (15-20%). …

Corporate finance activities should be done from an entity outside of a commercial bank. They should not be allowed to be funded by retail deposits.”


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