The international banking system is a vast and complex enigma. With over 30,000 banks worldwide, holding trillions of dollars in assets, it’s hard to imagine a time when banking was designed to make life simpler. In 11th century Italy, where European trading thrived, merchants faced a common problem: the circulation of multiple currencies. This led to constant money exchanges, conducted on outdoor benches, which is where the term “bank” originated from the Italian word “banco.”
As time went on, the dangers of travel, counterfeit money, and the challenges of obtaining loans prompted the need for a new business model. Home brokers emerged, providing credit to businessmen, while genevese merchants pioneered cashless payments. Networks of banks eventually spread across Europe, extending credit to even the church and European kings.
Fast forward to today, and banks primarily operate in the risk management business. People deposit their money in banks, receiving a modest interest rate, while the banks lend out that money at higher interest rates. This calculated risk allows banks to provide resources for individuals to purchase homes and for businesses to expand and grow. Banks also earn income through accepting saving deposits, credit card businesses, currency exchange, custodian services, and cash management.
However, one of the main issues with modern banks is that many have veered away from their traditional role of providing long-term financial products in favor of pursuing short-term gains with higher risks. This was evident during the financial boom, where major banks engaged in speculative trading and risky financial constructs, resulting in the collapse of the housing market and a global financial crisis in 2008. This crisis led to the loss of jobs, evaporated wealth, and a significant decline in trust towards bankers.
Governments worldwide were forced to implement bailout packages to prevent banks from going bankrupt. New regulations were put in place to govern the banking industry, including compulsory bank emergency funds to absorb shocks in future financial crises. Despite these efforts, some tough new legislation aimed at preventing such crises was blocked by the banking lobby.
In response to these challenges, new models of financing have emerged. Investment banks that charge an annual fee instead of commissions on sales provide incentives to act in the best interests of their clients. Credit unions, established in the 19th century to bypass loan sharks, offer similar financial services with a focus on shared value rather than profit maximization. They are controlled by members who democratically elect the board of directors. Credit unions weathered the financial crisis better than traditional banks due to their risk management practices and member-focused approach.
Additionally, crowdfunding has experienced tremendous growth in recent years. Individuals can obtain loans from large groups of small investors without the involvement of traditional banks. This funding method has benefited not only individuals but also technology companies looking to launch innovative projects.
Lastly, micro-credits have become a multi-billion dollar business, particularly in developing countries. These small loans help individuals escape poverty and start their own businesses. The granting of micro-credits has opened doors for those who were previously deemed unworthy of financial assistance.
The role of banks in providing funds to individuals and businesses remains crucial for society. However, it is up to us to decide how we want banking to evolve in the future. As alternative financing methods gain ground, it is imperative to prioritize long-term stability, risk management, and the best interests of individuals and communities.