Why Major Banks Have Little Interest in Old Fashioned Banking

Executive Summary

• Old fashioned banking is banking that covers the basics for customers rather than esoteric scams, which is what modern banking is all about.

Introduction

Old-fashioned banking is explained in the following quotation.

Old fashioned banking is the deragatory term used by private banking interests to describe low margin banking services like check cashing and making business loans. “New banking” only does these things to get access to customers to entangle in complex financial products. As major banks move away from “old fashioned banking,” they are leaving larger percentages of the population with lower banking services, while at the same time the private banking interests oppose government entrants that will provide “old fashioned banking” services, like the US Post Office did in the past (from 1911 to 1967), and as has been proposed again to help the US Post Office make up for the revenues it lost from the rise of email. This is yet another problem with allowing banking to be private and profit based. This is covered in the following quotation. “Infrastructure regulation has widely acknowledged that we should not expect market pricing based on marginal cost to provide universal access to necessary services, because it is not as profitable to serve low-income and low-wealth groups. To overcome this, universal service requirements have long been a classic component of infrastructure regulation. Since its inception, for example, the USPS has served routes that it knew would never be profitable because providing universal access to communications infrastructure was seen as a public priority. Additionally, many transportation and utility providers have also had universal service requirements where they were required to provide transportation and utility services to unprofitable areas, with universal access as the primary motivation (Lewis and Severnini 2017; Ricks 2018). Universal service requirements were a key component of New Deal era banking reform, which envisioned the role of banks as similar to a quasi-public utility (D’Arista 1994). However, following the financial deregulation of the 1980s that removed the regulations that functioned in a similar manner to universal service requirements, commercial banks and other depository institutions transitioned away from offering basic, low-cost financial services in favor of pursuing higher-profit activities.2 The recent trend of bank branch closings also provides an example of how marginal-cost pricing contributes to financial exclusion by reducing access to traditional financial services in low-income communities. Bank branch closings have accelerated since the financial crisis, with roughly 5000 branch closings from 2009-2014 (Morgan et al. 2016). However, these closings have not been distributed equally. Fully 93 percent of these closings have occurred in ZIP codes with income levels that are below the U.S. median (USPS 2014; Baradaran 2013). At the most extreme, this resulted in “bank deserts,” defined as a census tract in which there is no bank within 10 miles. This financial exclusion comes at a sizable cost to households. As the institutions that traditionally provided service to the poor have stopped offering these services, these households have no other choice than to utilize high-cost alternative financial services.” Old fashioned banking is the deragatory term used by private banking interests to describe low margin banking services like check cashing and making business loans. “New banking” only does these things to get access to customers to entangle in complex financial products. As major banks move away from “old fashioned banking,” they are leaving larger percentages of the population with lower banking services, while at the same time the private banking interests oppose government entrants that will provide “old fashioned banking” services, like the US Post Office did in the past (from 1911 to 1967), and as has been proposed again to help the US Post Office make up for the revenues it lost from the rise of email. This is yet another problem with allowing banking to be private and profit based. This is covered in the following quotation. “Infrastructure regulation has widely acknowledged that we should not expect market pricing based on marginal cost to provide universal access to necessary services, because it is not as profitable to serve low-income and low-wealth groups. To overcome this, universal service requirements have long been a classic component of infrastructure regulation. Since its inception, for example, the USPS has served routes that it knew would never be profitable because providing universal access to communications infrastructure was seen as a public priority. Additionally, many transportation and utility providers have also had universal service requirements where they were required to provide transportation and utility services to unprofitable areas, with universal access as the primary motivation (Lewis and Severnini 2017; Ricks 2018). Universal service requirements were a key component of New Deal era banking reform, which envisioned the role of banks as similar to a quasi-public utility (D’Arista 1994). However, following the financial deregulation of the 1980s that removed the regulations that functioned in a similar manner to universal service requirements, commercial banks and other depository institutions transitioned away from offering basic, low-cost financial services in favor of pursuing higher-profit activities.2 The recent trend of bank branch closings also provides an example of how marginal-cost pricing contributes to financial exclusion by reducing access to traditional financial services in low-income communities. Bank branch closings have accelerated since the financial crisis, with roughly 5000 branch closings from 2009-2014 (Morgan et al. 2016). However, these closings have not been distributed equally. Fully 93 percent of these closings have occurred in ZIP codes with income levels that are below the U.S. median (USPS 2014; Baradaran 2013). At the most extreme, this resulted in “bank deserts,” defined as a census tract in which there is no bank within 10 miles. This financial exclusion comes at a sizable cost to households. As the institutions that traditionally provided service to the poor have stopped offering these services, these households have no other choice than to utilize high-cost alternative financial services.” – The Public Banking Solution

Source: The Public Banking Solution

https://www.amazon.com/Public-Bank-Solution-Austerity-Prosperity/dp/0983330867

More details on old-fashioned banking are explained in the following quotation.

“The major banks use taking deposits as just an entry point to offer complex financial products, where they make most of their money. This is covered in the following quotation “The “big six” Wall Street mega-banks—Bank of America, JPMorgan Chase, Wells Fargo, and Citi, along with investment banks like Goldman Sachs and Morgan Stanley—take deposits these days almost as an afterthought. It gets them into communities (you can view bank branches as little more than building-sized billboards for more profitable financial services), and, more important, it unlocks federal safety net programs like Federal Deposit Insurance Corporation (FDIC) insurance and the “discount window,” the Federal Reserve’s program of low-interest loans. Mega-banks assert that they actually lose money on small deposits, and while we shouldn’t take this claim too seriously, it’s clear that deposits are not their primary concern. The other mainstay of traditional banking is lending—handing out money to be paid back at a set interest rate. And while mega-banks still make a lot of loans, they have basically determined that they can’t turn enough of a profit simply by sitting back and collecting interest. Loans to businesses represent just 11.5 percent of bank balance sheets, according to the St. Louis Federal Reserve. The bigger banks make fewer and fewer residential mortgage loans, and they hold even less of them in their portfolios; government-owned Fannie Mae and Freddie Mac own or guarantee 90 percent of all new mortgages. And mega-banks have sold off hundreds of billions in mortgage servicing rights, so a dwindling number of people write their mortgage check out to a bank. Bank of America, the second-largest bank by assets in the United States, has quietly exited the mortgage business altogether on a number of fronts, with other big banks joining them. Trading revenue at investment banks like Morgan Stanley and Goldman Sachs account for a far higher proportion of revenues than traditional investment bank activities like raising money for new businesses. And the biggest five mega-banks hold over 90 percent of all contracts in the $700 trillion market for derivatives, the second-order bets that accelerated and magnified the financial crisis. In effect, the “arbitrage” opportunities to capture risk-free money funds the speculative trading, where the real money lies. This runaway search for profit has contributed to the financial sector tripling in size since the 1940s, with six banks controlling two-thirds of total financial assets. the question becomes, who is doing the rest of the lending?

The answer is hedge funds, private equity firms, and other asset managers, which raise money from high-net worth individuals and institutions like pension funds, and make investments on their behalf. They collectively control over $53 trillion in assets, according to the Treasury Department’s Office of Financial Research, up 60 percent over the past five years. And lately they’ve poured a lot of that money into lending. The OFR report found that these asset managers effectively perform many of the same services as traditional banks, with the difference being that the risks they take, and the borrowed money they use to take them, are largely shielded from view. This raises several concerns. First of all, contrary to the idea that more competition drives down prices, shadow lenders charge more for their services, essentially extorting from businesses that cannot secure loans from regular banks. This exploitation and rent-seeking is depressingly normal in modern finance: research from New York University shows that financial services cost more than they did 100 years ago. Borrowers also must put up extensive collateral, including patents, to backstop liabilities, making it a riskier practice. Further, while the lack of oversight of shadow lending reduces compliance costs for financial institutions, it leaves regulators in the dark over what types of lending are happening in the system, and what risks exist. This renders irrelevant what was a very intelligently designed system for financial safety and soundness. And of course, shadow lenders aren’t interested in playing a supplementary role in the economy, but will place money wherever it can generate the highest profit, threatening a rush of capital from one speculative bubble to the next. No limits on the borrowing activities of shadow banks mean that they could ramp up their leverage, magnifying the impact of small losses. Moreover, shadow lenders don’t have the kinds of built-in safeguards that protect the entire financial system. A report from the Federal Reserve Bank of New York notes, “the lack of access to sources of government liquidity and credit backstops makes shadow banks inherently fragile.” If a shadow bank makes a disastrously bad loan, without the need to carry capital to absorb the losses, they would basically suffer with bankruptcy and collapse.” – PSMag

Source: PS Mag

https://psmag.com/economics/banks-dont-much-banking-anymore-thats-serious-problem-72654