FINS 5550 / FINS 3650 — International Banking
Recap — Introduction to International Banking
Consider this recap a bit of a treat, in that you should be able to have written this
recap on your own.
In later weeks, as we delve deeper into the workings of international
banking, your recap should include more and more details drawn from the required
readings and any other materials where your curiosity might draw you.
So this is my gift
In future weeks, the recap will be your gift to yourself.
And perhaps to your
classmates, for if you post your recap, you stand to earn class-participation marks.
— Cite included for the purpose of crediting authors with their work.
— Could be a really interesting source, but most likely of interest only to those
interested in pursuing the topic, either because of intellectual curiosity, or
because one’s paper is on the topic.
— Generally applicable to course requirements, but don’t memorise it!
— Essential material, either because of its topic matter or its insight.
you SHOULD memorise it.
Topic 1 — The Genius of Banking
One would have thought that banks were there with Adam and Even in the Garden
of Eden, living in paradise, naked and unfettered.
Whereas Adam and Eve were cast out
of the Garden, the punishment for the poor banks was to be saddled with regulation.
And ever since it’s been red tape keeping the banks from running free.
Banks are and always have been creatures of regulation.
A banking licence
constitutes membership in an elite club, the special privileges of which the banks use to
make enormous sums of money.
In particular, a bank can take deposits without the
disclosure and registration requirements that would apply to, say, a BHP if it were to
borrow money from individuals.
The licence means that individuals who lend (deposit)
their money to the bank can treat that claim as if it were cash — “money in the bank”, or
at the very least, “M2 in the bank”.
This gives banks a role in the money creation
process, and in fact banks are
to perform this function, transmitting monetary
policy to the real economy.
But monetary policy isn’t what bank managers think about in their spare time.
Instead, they focus on taking as many deposits as they can.
As PIMCO’s Paul McCulley
The essence, or the genius of banking, not just now, the last century or
the century before that, but since time immemorial, is that the public’s
demand for assets that trade on demand at par is greater than
demand for these types of assets.
The only problem with funding a bank lending book with deposits is what happens if all
the depositors wake up one day and want their money back.