The New/Old Face of Banking

Oh, I know the “It’s A Wonderful Life” answer of “Fred’s money is tied up in Joe’s house.” Financial intermediation was a way that banks functioned in the past, transforming a large number of short-term deposits into a few longer-term loans—and providing some financial expertise along the way. At their best, banks recycled cash within the community and helped it invest in new ways to make the economy grow.

But that social compact frayed a long time ago. Now mortgages are underwritten by Federal agencies; commercial loans are syndicated or sold; financial expertise is available via the latest app or streaming video. Today banks make a lot of their money just by taking on risk: investing short-term borrowings from the Home Loan Bank into mortgage securities issued by Fannie Mae. While those profits are real, it’s hard to see what social function they serve.

Banks do add value by providing banking services: deposit-taking; check-clearing; credit card and debit card services. For these services they charge modest fees. But the real value that banks serve in their communities—and in the nation—comes from their risk-management. Banks can provide appropriate loan pricing for local businesses; or more competitive rates for mortgage loans on properties where they know the neighborhood—and the borrower.

Asymmetric information is a problem in finance: the borrower often knows more than the lender, and fraudulent losses can result, leading to more expensive financing. By knowing their customers and reducing the asymmetry, borrowers can get more efficient financing and the bank earns a fair risk-adjusted return.

That’s the new face of banking: risk-management. Not through some arcane black-box statistical spreadsheet, but by shoe-leather-intensive customer knowledge. And that will never be replaced by a model.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-09T16:32:14+00:00 February 2nd, 2012|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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