Archive for October 9th, 2019

Are Bankers like magicians who pull rabbits from hats?

October 9, 2019

Another interesting speech by Lars Rhode, head of Denmark Central Bank. See earlier ones: one, two).

This speech is given on occasion of 100 years of banking supervision in Denmark.  He starts comparing bankers to magicians!:

What are the characteristics of banking?

In the words of the historian Søren Mørch – loosely quoted – banking belongs in the department where rabbits are pulled out of top hats and ladies are sawn in half. This only works if the audience – the banks’ customers – behave as expected and do what they usually do.

If the customers do not trust the bank, there will be a run on the bank. The trick will fall flat, and the money will vanish.

We can try to regulate our way out of the risk that the trick will fall flat. But whatever we do, we can never guarantee that the banks will not experience problems. So does that mean that we should avoid regulation? The answer is “no”. Regulation is a must.

🙂 Interesting way to explain need for banking regulation.

He then reviews the history of banking supervision in Denmark which is a decent read for banking historians.

In the end:

I started by talking about pulling rabbits out of top hats and sawing ladies in half. But don’t get me wrong. Banking is no joking matter. Regulation of the banks is necessary as they play a special role in society.

Financial regulation and the financial supervisory function, which has now existed in Denmark for 100 years, are primarily there for the citizens and
firms – not for the banks.

Banking and rules undergo continuous change. Take for example payment services, where costs to society are almost halfed since 2009. Increased competition and innovation is something we should welcome.

Future financial services and functions will perhaps be delivered by new actors. They may claim they are not banks and therefore should not be
subject to supervision. However, the guiding principle should always be that it is the function which is regulated.

The new challenges for the supervisory authority are best solved in close and binding cross-border cooperation, which is precisely what the strengthened banking cooperation is about. None of us know what tomorrow brings. But it is our duty to do our best to protect the fundamental financial functions of our society.


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