The Future of the Banking Industry

In the times of Bonnie and Clyde, banks earned a reputation as the scourge of the financial industry. This perception can be mainly explained by the role of the banking system in the Great Depression of 1929. Greedy and not very farsighted financiers were giving loans left and right, fueling the 1920s credit boom, or should we call it a credit time bomb?

In reality, we could even say that banks were among the creators of the financial crisis as they provided the money that individual investors needed to buy stocks on margin.

80 years later, the situation repeated itself, and the global economy has got into another bubble burst. Many years later, Ben Bernanke, former head of the Federal Reserve, said that the Great Depression was all about the banks—from the central bank to the smallest savings institutions. He even said sorry, but apparently, nothing has been learned since then – banks continue to make risky bets that could eventually trigger a financial crisis.

You need an example? Check what happened with Archegos family office. Ask yourself why risk departments of big banks allowed this sort of operations?

It is hard, if not impossible, to imagine our current financial systems without banks. First, they are the primary and legal source of lending money to consumers and businesses in upturns and downturns. Of course, you could go to a local gangster, but we all know from the movies what happens when one doesn’t pay back. Secondly, banks are the main processors of the financial market. Nowadays, most of the operations are carried out digitally, and banks make it possible. Additionally, they allow people and businesses to store the money in either a checking account or savings account and then withdraw it as needed.

Some say that blockchain can make the banking system even more reliable. These people are damn right. Let’s start by saying that if this wasn’t the case, sharks like Goldman Sachs or Citibank would never consider integrating blockchain in their system. What’s more, even central banks understood all the features of a peer-to-peer (P2P) network. No surprise they began working on so-called CDBCs or Central Bank Digital Currencies.

Of course, it could also be explained by a crypto boom industry. Central banks do not want to lose control over the money supply. I talked about this here. The major losers of this CBDC story could be the banking system.

According to a study provided by Fitch Ratings, “Widespread adoption of CBDCs may be disruptive for financial systems if associated risks are not managed. These include the potential for funds to move quickly into CBDC accounts from bank deposits, causing financial disintermediation, and for heightened cybersecurity threats as more touchpoints are created between the central bank and the economy.”

The Economist article, on the other hand, suggests that CDBC could undermine the provision of credit. For years most monetary systems have relied on the framework of a lender-of-last resort in the form of a government-backed body that can step in to save solvent financial institutions. As I mentioned earlier, banks collect deposits and make loans. By holding only a portion of these deposits and lending the rest, banks create money. If banks lose clients, they won’t be incentivized to give loans; thus, interest rates will surge.

In conclusion, it is hard to believe that soon banks will lose their hegemony, but the process is going on. Eventually, we will start using CBDCs. The only question is who will benefit from it besides central banks themselves and Big Brother.

The banking industry is clearly under attack from new technologies, digital banks, and central banks. To survive and remain profitable, they are forced to furlough employees and close offices. People will adapt as they always have, but will the banks be able to do the same.