BANKING MATTERS
AN ESSENTIAL GUIDE TO COMMERCIAL BANKING IN AN AGE OF DISRUPTION
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Copyright 2021 Duncan Knowles.
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Disclaimer
The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied upon as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permissible by law, the author disclaims all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.
ISBN: 9798720951177 (paperback version)
Independently published
www.becausebankingmatters.com
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Table of contents
Introduction
Banking matters
In 2008, the worlds financial system came close to collapse. Without the decisive actions of policymakers, the consequences could have been horrific, with banks failing, credit disappearing, companies bankrupted, and people impoverished. Banks were bailed out, at huge cost to taxpayers everywhere, and although disaster had been averted, many people lost their jobs and their livelihoods.
In the aftermath of the crisis, a wave of scandals hit the banking industry, from mis-selling of complex and risky products, through price fixing in financial markets, to aiding and abetting financial crime. Banks paid out huge sums of money in fines and remediation to their customers, but the impact on their reputations was arguably more damaging, and will be much longer lasting.
The unpopularity of banks, coupled with their high levels of profitability and the perceived economic injustice of bankers income led to a wave of investment in firms that sought to challenge the banks: neo-banks, fintechs and new financial services arms of large technology firms. Disruption of financial services became the new creed; problems with banks and the banking system would be resolved through the emergence of new players with new technology.
Even with support from politicians and regulators in many markets, most of these challengers have struggled to achieve profitability, despite having built large customer bases in short spans of time, and despite being often seen as more innovative, more relevant, and more customer-oriented than the incumbent banks. Banks that should be uncompetitive continue to dominate finance.
Why then do societies not take stronger action? Why not tilt the playing field much further against incumbents? Why not break up, or even abolish, the banks?
Because banking matters.
Too few people understand the critical role that banks and banking play in our economies. Banks play a key role in monetary policy, creating most of the money that we borrow, spend, save and invest. The worlds payment systems depend on banks to keep money flowing. Banks supply the economy with liquidity, the ability to access money when we need it. Banks allow individuals savings to be safely used to support firms growth.
Banks are not normal firms. Banks activities create significant risks; risks that can cause the collapse of whole economies, but risks that are essential to keep economies dynamic, and for their citizens and businesses to prosper. Banks need to be continuously monitored, closely supervised and robustly regulated to keep these risks under control.
Banks guard the entrance to the financial system on behalf of society, working to prevent criminals from financing their activities, or from benefitting from their crimes. Banks protect individuals and firms from fraudsters, constrain those who seek to evade making their fair contribution through taxes, and impede the flow of bribes and dirty money that threaten to corrupt institutions.
This is not to say that banks are perfect, nor that disruption of banking would be unwelcome. The scale and frequency of banking crises and scandals shows a need for constant vigilance over banks activities; and suggests that there may indeed be a better way. But banking matters, and as it is disrupted, the roles that it plays in society must continue to be performed for the benefit of us all.
Anyone working in a bank, seeking to disrupt banking, or undertaking banking activities, needs to understand the role they play and the potential impact of their actions. Because banking matters.
Background
This book began with a series of short training sessions on banks and banking I provided to teams working on digital banking. The highly talented people working in these teams came from all manner of digital companies, including some of the worlds largest technology firms, but often saw banking solely from their perspective as a customer. These training sessions sought to help them put their work in context.
After every such session, I would stay back to answer questions, often extensive in number and scope. The most common such question was where can I learn more?, to which I was unable to provide a satisfactory answer.
As I started to search for materials, I realised that there were plenty of academic textbooks on banking, handbooks for practitioners in technical areas, training manuals for banking qualifications, and books on financial management for individuals and firms. However, there appeared to be few, if any, books providing the content people were looking for.
A career break in early 2021 gave me the opportunity to reflect on my own next steps, and with it the time to consolidate my thoughts, and to put pen to paper (or more accurately fingertip to keyboard) to fill this gap.
Scope
The financial services industry is vast, and covers a huge range of different activities (see chapter 9 for a brief overview). This book focuses only on commercial banking, its role in the economy, and the products and services commercial banks provide to their customers.
Many aspects of commercial banking, such as asset and liability management, risk management, trade finance, and treasury and cash management are broad topics of significant depth, requiring many years of study and practice to master. This book does not aim to cover such aspects in depth, providing only an overview to support a wider understanding of commercial banking.
Three annexes are provided that go into slightly more depth on areas of potential interest that might otherwise interrupt the flow of the material.
Intended audience
This book is intended for people working in and around banking. It is not a textbook, nor a manual, but a guide for those who either want or need to understand banking to support their day to day work. People who may benefit most from reading it include: people working in fintechs, challenger banks and in financial services divisions of big technology firms; people in the first few years of a career in commercial banking; specialists from any one area of commercial banking who want to place their work in context; people selling products and services to banks; and people working within corporate functions (such as strategy or human resources) in banks.
1. Money and the role of banks in the economy
Properties of money
Whilst all of us are familiar with money in terms of the notes and coins in our wallets, or the balances in our accounts, most of us spend little time thinking about what money actually is in a more general sense. To understand banking, we need to understand the properties of money in a little more depth.
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