10:25 pm - Monday December 18, 2017

Of Banks and Bankers

Like other business, banks exist to acquire and use assets so that the value of their benefits exceeds their costs.

Their basic functions are – borrowing and lending, price determination, information aggregation and co-ordination, risk sharing and providing liquidity – all in an efficient manner.

They segment markets and build in depth knowledge of customers, develop wide range of demand driven products and services, leverage on appropriate technologies and develop multi channel network for delivery of products and services.

They facilitate perfect intermediation and enable reduced transaction and information costs – costs in the form of search cost, portfolio selection costs, monitoring costs, risk management costs and liquidity costs.

The managerial objectives therefore in any bank provide customers with the benefits of intermediation. This is possible by focusing on their needs and engendering trust.

Well. Banks are not built overnight. They are built over a period, establishing trust in the first place in a credible, reliable and enabling manner and retaining this trust.

The business of banking has indeed produced a good number of illustrious bankers who built their banks with passion, performance and perseverance.

As compared to these banking beacons, we have few modern bankers who are greedy to a greater extent, refuse to learn lessons and mend their ways, often fail to live up to their role of a trustee and are arrogant and exhibit lack of humility

I recognize that all present day bankers do not exhibit these qualities. However, history has recorded even the presence of one such banker was sufficient enough to bring the banks down.

Yes. One Nick Leeson was enough to bring centuries old Barings Bank down and closed. One Jerome Kerviel could inflict worst kind of wounds to SocGen.

Keep in mind we still have such modern bankers in our midst and they are lying low for the present.

We need to protect our banks. Regulation could be one such protectionist measures.

However, our present regulatory provisions focus on the banks rather than on the bankers. We need to regulate these bankers.

Peter F. Drucker once commented at a conference at Wharton in 1993: “The first textbook on banking published in 1903. It began with two sentences: ‘Banks prosper because of the incurable ignorance of the public. Banks make money from the margin between what they get on the money they pay out and what customers get on the money they pay in’

If he were alive today, he would have surely added that these few modern bankers make more money than the banks themselves over a period of time at the cost of their customers.

So banks…watch out…these modern bankers may harm you and your business. Regulators…turn your focus on these modern bankers rather than on banks.

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