"Unless banks can better demonstrate their usefulness to society, they face a debilitating battle against new regulation," John Gapper wrote in the Financial Times last week. His analysis of "capitalism in crisis" presented some shocking numbers. Since 1977 trading in foreign exchange went up by 23,000 percent. And a breakdown of the revenues for 18 leading investment banks shows that they made 80 percent of their revenue with "secondary market trading."
What these numbers basically mean is that banks are making money with money rather than providing the services to society that they were originally established for: collecting and rewarding savings and using these funds for investments that would enrich society. John Gapper is very right: Many banks are no longer useful to society. "They have drifted away from their basic social function -- to encourage growth by making loans, underwriting securities and advising companies -- into a self-interested drive to make money by any means," he writes.
Investment banks used to make most of their money through financing mergers and flotations, which the corporate sector -- and society -- needs for healthy development. Today they make their money with "trading" -- i.e. hedge funds, derivatives and other "creative financial instruments" -- while only a small portion of their revenue comes from these banks' purported core activity: corporate financing. Banks have become enormous gambling clubs that create a great deal of unhealthy economic turbulence.
The CEO of ING Direct, Arkadi Kuhlmann, argues in Ode that banks are "humble intermediaries." "We don't produce anything. We don't save children who are ill. We don't go to the moon. We are just oil in the economic machine. A bank should act as a utility. Our primary function is to allocate money, resources within the economy. A bank bridges the time gap between when people have extra resources -- money -- and when they have a shortage of money." Such a service deserves a fee, but not the huge returns that banks have been making recently. "We have had an aberration," Kuhlmann says in a recent interview. "It doesn't make sense that banks, being basically financial intermediaries, make a disproportionate amount of profit."
Kuhlmann built the largest online bank in the U.S. and reintroduced an ancient banking concept to America: saving. Kuhlmann will be speaking at an Ode event in San Francisco on February 1. To attend at the venue or online, click here.
Politicians and bureaucrats are trying to come up with new regulations to prevent new banking excesses in future. But aside from better supervision and more rules, the most important change may be to force the financial sector to return to its core business: supporting and facilitating the business sector in the interest of economic development that serves society. Making money with products and services is healthy. Making money with money is a recipe for disaster.