Boring Banking vs Exciting Banking

I was reading this recent speech by RBI Gov Dr Subbarao.

He says there are calls to make banks boring. He cites works of Krugman, Volcker, Mervyn King and Dr. Reddy who in their own way have advocated the call to make banks boring.

Taking a long term historical view, Krugman argues that there is a negative correlation between the ‘business model’ of banking and economic stability. Whenever banking got exciting and interesting, paid well and attracted intellectual talent, it got way out of hand and jeopardized the stability of the real sector. Conversely, periods when banking was dull and boring were also periods of economic progress.

To support his thesis, Krugman divides American banking over the past century into three phases.

The first phase is the period before 1930, before the Great Depression, when banking was an exciting and expanding industry. Bankers were paid better than in other sectors and therefore banking attracted talent, nurtured ingenuity and promoted innovation.

The second phase was the period following the Great Depression when banking was tightly regulated, far less adventurous and decidedly less lucrative – in other words banking became boring. Curiously, this period of boring banking coincided with a period of spectacular progress.

The third phase, beginning the 1980s, saw the loosening of regulation yielding space for innovation and expansion. Banking became, once again, exciting and high paying. Much of the seeming success during this period, according to Krugman, was an illusion; and the business model of banking of this period had actually threatened the stability of the real sector. Krugman’s surmise accordingly is that the bank street should be kept dull in order to keep the main street safe.

Then Gov says he does not agree to the boring banking as a choice at all. The banks need to become global with global economies and should be offering more financial services. Moreover, you make boring banks but risks could still come from other financial institutions like i-banks (or casinos as some might call it; I actually like the term casino) . The real issue is that we need to regulate and supervise them properly. Banking does not become boring but more challenging.

The same idea is applied to Indian banks as well. There are more challenges on the way. He lists 4 to begin with

  • financial inclusion
  • risk management
  • financing infrastructure
  • increasing efficiency of banks

Good points.

But seeing the non-willingness to reform financial regulation, I have little hope.  Infact, the banks/non-banks could continue to be exciting as we are going to witness more crises in future. They would remain exciting not for the kinds of challenges they have at hand; but for the kinds of challenges they would keep throwing at policymakers, academia, real economy etc.

2 Responses to “Boring Banking vs Exciting Banking”

  1. Boring Banking vs Exciting Banking « Mostly Economics | Money Blog : 10 Dollars : Money Articles. Says:

    […] View original post here: Boring Banking vs Exciting Banking « Mostly Economics […]

  2. Dr YV Reddy special- S. Guhan Memorial Lecture « Mostly Economics Says:

    […] YV Reddy special- S. Guhan Memorial Lecture By Amol Agrawal Dr Subbarao in his recent speech provided refernce to a recent speech Dr Reddy gave in memory of S. […]

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