The Bankwatch

Tracking the consumer evolution of financial services

The Economist Special Report on the World Economy coins the term ‘Gandhian Banking’

Under the heading ‘Gandhian Banking’ The Economist reveals the extent of worldwide government injection into banks at $432 billion by this spring and guaranteed bank debts at $4.65 trillion. Of perhaps even greater significance is the implicit guarantee that now exists for all banks.

By this summer 33 American banks had repaid the capital the government had injected into them. The new era of state ownership seemed to be passing almost as quickly as it had arrived. But the state still has a large stake in the financial system beyond its explicit ownership of shares. It now owns the risk of any of the bigger institutions failing. Governments will do their utmost to avoid a repeat of anything like the bankruptcy of Lehman Brothers and the ensuing chaos.

The piece is part of the Special Report on the World Economy. The broad theme of the report is one that has taken the media some time to catch up with, and that is the meaning of recovery and getting back to normal, or as they call in the ‘new normal’ and ‘normalcy’.

Massive fiscal and monetary stimulus is cushioning the damage to households’ and banks’ balance-sheets, but the underlying problems remain. In America and other former bubble economies, household debts are worryingly high, and banks need to bolster their capital. That suggests consumer spending will be lower and the cost of capital higher than before the crunch. The world economy may see a few quarters of respectable growth, but it will not bounce back to where it would have been had the crisis never happened.

The reality of the new normal is that it does require significantly different planning and strategies and continuing with the pre 2008 strategies will not succeed. Again, and as noted yesterday (To Big to Fail and How Little the Concept is Misunderstood) it will be fascinating to see where the innovation in consumer banking products and channels comes from in banking.

Going back to my earlier ramblings on the future of banking lying in two camps:

  1. financial utilities
  2. innovators

… I remain even more convinced of this evolution. At the moment, the majority or all of TBTF’s (Too Big to Fail) are or will be in the financial utility category based on their fiddle while Rome is burning approach.

Written by Colin Henderson

October 5, 2009 at 22:16

Posted in Uncategorized

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