Academic journal article ABA Banking Journal

Another Type of "Traditional"

Academic journal article ABA Banking Journal

Another Type of "Traditional"

Article excerpt

THERE'S BEEN A REAFFIRMATION of late of the concept of traditional banking. While there's no official definition of that term, our sense is that it is usually taken to mean the business of raising deposits and using them to make loans. As many people have observed, banking is a fairly simple business. Whether a person is any good at it depends largely on how carefully they lend out the money and how well they manage their cost of funds and operating expenses. It's more complex in practice, naturally. (The article on interest rate risk, p.28, makes that clear.)

Then there is nontraditional banking. This is variously labeled "capital markets," "investment banking," "Wall Street," etc. Many players here are not banks at all in the traditional sense. The two bankings are quite distinct, both in function and culture, but they are also intertwined. This was true even when the law kept them apart. Cost of funds and the availability of capital are examples.

Then there is the secondary market, part of nontraditional banking, which has been an integral part of the residential mortgage business for decades. There has been talk about returning to the lend-and-hold model, once the norm. That doesn't seem too likely or feasible, however, without dismantling the financial system as we know it.

No, we've created the modern economic world of which finance is an integral part and we're stuck with it now. But that doesn't mean it can't or shouldn't be improved. We would be well advised to remember that the "modern worlds" of old--Rome, Greece, Egypt--all thought they were here to stay, and yet they all faded into oblivion.

Recent events in the broader financial world came perilously close to causing a worldwide "economic winter" and, in fact, caused--and continue to cause--untold distress for millions of people. …

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