The Flaw in the Banking System

| June 17, 2013

moneybankIt is no secret that a large portion of the population blames the banks for the financial crisis that has gripped the world since 2007. The main efforts to extricate these institutions from their self-imposed financial quagmire have centred around supplying the banks with the liquidity necessary to “prime the pump” and in turn, pass this money across to small businesses in the form of loans. However, it has recently come to light that this scheme has largely failed. This may seem a bit odd, for were these not the very same institutions that were chastised for lending to less-than creditworthy customers? If the funding for lending scheme was put in place, why have we continued to witness an insolvency in the system?

This is particularly interesting due to the fact that before 2008, bankers were considered to be some of the most conservative and pragmatic individuals in the industry. At the height of the financial meltdown, laws were put in place to help reign in what proved to be the exact opposite. So, the pendulum swung the other way. Tighter regulations now prohibit many of the practices that had caused the bubble to burst. Money has been given to the banks to disperse amongst their customers, yet little profit is being made and even worse, banks are actually lending less.

Why is this? The primary reason seems to be that when it comes to risk management, these institutions are still well behind the times. This may be considered quite ironic, since these very same institutions were the ones that gambled with capital that arguably was not theirs. The bedrock that seems to support this mentality is that banks may view lending as rather binary in nature; they either will lend large amounts of capital or none whatsoever. As well all know, profit or loss may not always be so black-and-white.

Should the blame once again fall heavily upon the burdened shoulders of these institutions, or may there perhaps be a bit more to the equation? Politicians and the public scold and scorn for over-lending and then criticise when they do not lend enough. In fact, this may appear to be a simply knee-jerk reaction from the banks in relation to whatever current financial and political pressures may be present at the time. Regardless of the root cause, it is quite obvious that not only do the banks need to take a more flexible stance to lending, other factors need to be considered to fully appreciate why these binary lending reactions are continuing to take place.

Tim Aldiss writes on behalf of London PR agency Broadgate Mainland.

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Category: Banking

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