Most companies have an incentive to keep low debt to equity ratios. Banks on the other hand have an incentive to lend greater amounts of borrowed money and increase debt levels on their balance sheets. It has been the nature of the industry, but does it make sense to allow that kind of business practice anymore. Many people see it as too risky. Some financial academics believe corporate banks would have a hard time operating with higher levels of equity because people would choose to put their money elsewhere for a higher return.
You have to wonder, does it even make sense to have big corporate banks in the future if their success is dependent on high volume, high risk lending? This story has me thinking we can do better as a society. Not just shifting our focus to local banks and credit unions, but transitioning larger financial institutions from a for-profit environment, to a more not-for-profit business model. It would be a real challenge, yet the potential benefits to communities nationwide might be worth the effort.
Instead of borrowing large sums of money to be directed out in the form of various loans with different risks, smaller sums of money could be lent with average risk. The overall return might be a lower percentage, but more of those interest collections could be passed on to depositors in the form of higher interest yields because stock investors are removed from the equation. Certainly the keys to keeping consumers with a financial institution include:
- Making smart loans (which they didn’t)
- Paying decent interest to depositors (which they haven’t)
- Providing quality products and services (which they’re getting better at)
Have you recently changed where you keep your money? Do you love your bank?
Source: NPR: Planet Money Podcast #344