The Chinese banking system does this. With regards to not losing money on underperforming loans, the government just prints up money and bails out the banks for all their mistakes. To keep moral hazard from getting out of hand, financial fraud or even rule breaking is punished severely with the worst frauds leading to executions and the banks are micromanaged to the point of being partially privatized central planning.
It's worth noting that printing money and giving it to the banks is effectively the same as taxing cash - it causes inflation and reduces the value of Yuan-denominated assets (though there are ways to manage this).
By doing this, the Chinese government is subsidizing entities that borrow from the bank (which are often SOEs) without directly taxing its citizens.
Also worth noting that China prints money to keep the Yuan low and then charges high interest rates to keep the cash from the markets and keep salaries low.
The big Chinese banks (BOC, ICBC, ...) are all SOEs, so they are basically owned by the government. Interest rates on deposits are paltry (even by western standards), and the banks make all their retail money on shadow banking products. What really kills the banks, however, is the loans they are forced to give out to other SOEs.
Most people just need to be able to use their money electronically. When the business model of banking is to have everyone give you all their money, then loan out 90% of it, it doesn't seem like such a difficult task. The reality is that it is difficult to start a new bank.
That’s not actually how banks work at all. The amount a bank can lend isn’t at all linked to the amount of deposits it has - banks lever capital, not deposits. And they can lend more than 10x that - I think with the recent Basel III rules it’s 12.5x tier 1 capital, but back around the GFC when there was less regulation some banks were 30x. (The US does have a reserve requirement too but most countries don’t. There’s no real need when you have a central bank as a lender of last resort).
To satisfy double-entry accounting rules, banks actually create deposits from loans, not the other way around. Deposits do help with liquidity for fulfilling interbank transfers (and rules now have liquidity requirements that deposits count towards), but as long as they are not insolvent the bank can also just borrow the reserves it needs from other banks or the central bank.
No problem, I expect most people don't know this. Don't worry though - even some economics textbooks contain those kind of loanable-funds / money multiplier models that don't really describe the real-world workings of banks!
I guess it's a holdover from classical economic theory - banks did work more like that a century ago when that kind of economics was being worked out (pre-WWI gold-standard days) but the modern economy is different!
I don't need a physical location, but would like a place I can sent a check to. Just an ATM? Forget the fancy office no-one goes in anymore? Oh yea, technological security would be appreciated. Never understood why they don't sent an email everytime I use a debt card?
I don't care about the loan because they will never give me one. I get it. This is America. The place where the poor get one chance, usually a high interest credit card.
(This is what most America's want. Most of us are barely getting by, and I believe banks have colluded on fees. And they are still redlining. Loans--well it's so much more than good credit, and pay stubs. It's basically dad signing away the family house in order for most of us to get a decent loan, and some of us would never take that risk.)
The state of North Dakota has its own bank, the only state that has one. It provides services to citizens of the state such as home, farm and student loans. It also is the bank of the state government, all state tax revenues are deposited there. It was formed in 1919 as a way to allow farmers to get low cost loans.
As that article puts it: "On behalf of small farmers and merchants, the Nonpartisan League advocated state control of mills, grain elevators, banks and other farm-related industries in order to reduce the power of corporate political interests"
Senator Kirsten Gillibrand introduced a postal banking bill last month that would offer similar services to everyone in the United States. It is unlikely that it will even make it to the floor for a vote given the current makeup of Congress, but that could change with this year's midterm elections.
Postal banking could help revive the postal service. Many countries already provide these services through the postal system. Or even, believe it or not, 7-11.
I wonder if there's any thought within American Samoa of leaving US administration and re-unifying with Samoa itself. Samoa has several banks, ANZ being the largest. It would make sense and form a country of > 250k rather than having one country of under 200k and another of under 100k.
Nice to see them mention the bank of North Dakota. They had similar issues with local banking needs not being met by anyone else so they started their own bank to float local banks that could and were willing to help locals and fund new local banks as well.
It also provides good rates on student loans as well.
Public banks are a good idea. It is part of the success of SME in Germany, because we local and public banks to support them. The third pillar are co-op banks. Which have a similar role.
With 60K population 6 hours by plane remote it's a miracle they had any bank branches at all for this long.
Cost of having remote branch for any business in these conditions is high, so profits should match it. It makes sense that they need local, more efficient, solutions for the problem.
> To understand why banks are scaling back and why it causes American Samoa such pain, imagine a basic small-town bank. It takes in paychecks and other deposits from locals and uses them as reserves when lending to their neighbors, who then invest in property and businesses.
> That model breaks down when banks span states or countries. The big banks with tiny branches in American Samoa are happy to take deposits from locals, but when it comes to lending that money back out, it makes cold, actuarial sense to focus on bigger, safer clients elsewhere.
This is another pretty good general argument against bank consolidation. In addition to increasing economic fragility during crises, large banks also neglect real communities that need their services during the good times.
It really calls into question the efficiency of large banks, when by their structure, they have constructed inherent barriers to understanding what loans are a risk in communities. It becomes a self fulfilling prophecy that small loans in smaller communities become higher risk...
Suppose there was a bank local to American Samoa and another international bank with a branch in American Samoa, and the latter could offer higher interest rates because it saw fewer average defaults when lending money. Are you saying we should prohibit American Samoans from putting their money in the international bank and getting higher returns, effectively forcing locals to lend to other locals?
It's much simpler: Private Banking is offered for a profit, not because it is in demand. If an international bank can make more black ink stateside rather than Samoa, even if the risk/reward ratio isn't that different, the larger bank chooses the more profitable market to distribute it's loans. This puts Samoa in an awkward spot where they have a dearth of services, despite demand, simply because every bank made this analysis. It's classic Tragedy Of The Commons.
A public bank, in contrast, does not have to put this absolute profit first, giving them the flexibility to enter markets where they might not be as successful, but they don't have nearly the competition for their services. Additionally, since this is operated by the state, they can benefit from business loans and interest as another form of revenue, giving them room to cut taxes or improve services.
EDIT: As consolidation creates both larger businesses and larger reserves of capital, this causes the bank to make more conservative loans. They must play more defensively. As these banks retreat from "riskier" markets, it leaves genuine demand behind. Look at the article's description of "predatory lending" near the top of the article.
Because there is this pent-up demand, a local bank could open a branch that captures some of that demand, and incentivizes locals with higher returns than the international bank because they can charge a higher interest rate. But the IntBank wouldn't still enter this market because the size is still too tiny to warrant their attention and/or the interest rates locally don't move the needle in their global reserves. It's literally too small to be worth the effort.
It's not a tragedy of the commons unless something artificially prevents banks from charging a profitable rate for loans. If no other bank is doing business there, and if any bank which does do business is allowed to make a profit, then certainly one will. Indeed, that's what the 'loan sharks' are doing: providing desired services at a market-clearing rate.
It seems to me that a public bank will end up having to be subsidised from the general fund to cover its losses, which in the case of American Samoa probably isn't very large.
I think the risk for a business is that when the rates get too high, shadow banking just takes over. Which it will, because the rates will be really high.
It’s a whole lot of work to serve 55,000 people with a GDP of $13,000 per capita. There just isn’t enough economic activity to make this work from an international bank.
> Are you saying we should prohibit American Samoans from putting their money in the international bank and getting higher returns, effectively forcing locals to lend to other locals?
If it improves the local economic conditions by keeping money flowing in the local economy, then such a ban seems like a reasonable trade-off for the common good.
Being a greedy individualist, by focusing on chasing after marginally higher savings account interests rates, is likely going to be self-defeating in this case. Your dozens of dollars in extra interest payments are unlikely to compensate you for the other economic hardships you'll encounter because there's no local bank that will bother to make loans to your community.
But it doesn't direct local resource to unprofitable forms of work, it directs local resources to less profitable local forms of work rather than more profitable foreign forms of work. That seems like a perfectly reasonable trade-off for a community to make.
You're just dropping slogans. Please reply substantially on why you seem to think communities like American Samoa would be better off if its people couldn't get bank loans.
>> lease reply substantially on why you seem to think communities like American Samoa would be better off if its people couldn't get bank loans.
> I'd think it's obvious that they can't invest their money profitably if you don't let them do that.
I don't think you're really wrapping your head around the situation. No one's saying they "can't invest their money profitably." What's being said is that it's better for their community if their community's money is deposited in a local bank that makes loans to the community, rather than an international bank that won't (and perhaps pay slightly more in interest).
If you're having trouble wrapping your head around terms like "better for their community," you may have an easier time if you roughly translate it to "more profitable for their community."
You're confusing putting money in motion with actual production. If people don't invest locally, wages will fall until they've fallen enough that it's profitable to invest locally. There's no scenario in which investment dries up.
Now, in order for economic health, the investments made have to be put towards doing useful things. Ideally, very useful things.
(Edit: Notably, you can't invest locally if you don't have any profits to invest.)
Difficult to understand how people can still think like this. This is complete nonsense. Look around. The USA and Europe are littered with economic ghost towns where the disappearance of factories and industry sent the community into an economic death spiral from which they won't ever recover. Simplistic models like this have no bearing on the real world.
> If people don't invest locally, wages will fall until they've fallen enough that it's profitable to invest locally.
The problem with toy economic models like yours is that they're toys, and the elide many important factors in the name of simplicity. That simplicity can be extremely intellectually compelling, especially for laymen, but at the end of the day the world is complex and if you ignore that you have bad policy.
When all you have is a hammer, every problem looks like a nail. The solution to market failures is not more and harder market.
> There's no scenario in which investment dries up.
The literal facts are against you. The banks withdrew and American Samoans have no access to credit outside of usurious backyard moneylenders.
> Now, in order for economic health, the investments made have to be put towards doing useful things. Ideally, very useful things.
What at all does this have to do with anything under discussion? Usefulness is a local function and the precise problem here is that American Samoans (and others) don't have access to the credit they need do useful things in their communities. I'll bet you money that they're not planning to take out loans to do useless things like dig and fill in holes.
Anyway, I think we're talking past each other, and you seem more interested in performing dogma.
This thread is in response to your post about "prohibiting American Samoans from putting their money in the international bank," not about the current banking situation.
Again, I said that sounds like it could be a reasonable trade-off. You have to balance...
1. the good of the theoretical possibility of getting a pittance more in interest from an international bank with
2. the social costs of not having a well-regulated local bank that will make loans in the community.
If you totally ignore #2, you're going to make a bad policy decision. I think that's approximately what you're doing.
My position is if the good from #2 is greater than the good from #1, discouraging community members from depositing their money in a distant bank over a local one is good policy.
I'm increasingly thinking that this is a pretty good argument against consolidation in any industry (to be weighed against the benefits of economies of scale in the particular case).
Ive worked at a credit union. I’m supportive of the idea. However, credit unions aren’t efficient or even capable of providing all banking services people want. They’re especially poor at banking for people who travel internationally, and at providing business banking.
Also, most credit unions either use federal (national) credit unions and large banks for services. We bought our cash from JP Morgan, sold our mortgages to US Bank and kept reserves with a federal CU. Without these services, expenses would have been higher or services would have been reduced.
> Also, most credit unions either use federal (national) credit unions and large banks for services. We bought our cash from JP Morgan, sold our mortgages to US Bank and kept reserves with a federal CU. Without these services, expenses would have been higher or services would have been reduced.
Sure, but this happens at big banks as well. My company's bank is part of the Santander Group, which literally has trillions of assets, but they use Wells Fargo for many services. Every bank uses other banks for certain services at this point.
Interestingly, I had the opposite experience. In my area the credit unions have fees equal to our greater than the big banks for personal accounts. However, one local credit union had the best stats for my small business account.
It's worth noting I did not travel internationally or do any international business. Also, their ATM was the old green screen style as late as 2015 and did not accept deposits.
Interesting! I suppose if in any community enough CUs can specialize in all the necessary banking services, the case for exclusively using them is easier to make.
Yes, the lagging technology is a big problem. We were still renting a T1 and two phone lines from AT&T for connecting to online banking on a server in the break room. We did manage to switch from 24 hour to relatively instant reconciliation of things like ATM withdrawals, but our tech was badly lagging state of the art retail banking. In some ways this kept service more personable, but also caused account attrition. And I don’t think we were especially worse than other CUs of our size.
And yes, I fought hard for any change we could afford, and yes, the board was disinterested. One member owned a paper supply company and actually pushed back against e-statement marketing so he could supply more paper. It might as well have been a scene from The Office.
They’re really helpful if you want to live in a world with for-profit international companies. (You want to live in a world with for-profit international companies.)
No, but this is no a bad thing, because these sorts of large financing projects can be funded via direct sale of notes to the public or an issuance of stock. We can still have consulting companies that advise companies on how to arrange these sales, and advertise them internationally (similar to what an investment bank does now).
Banks have an odd relationship with risk. It's vastly safer to have a large number of banks than to have a much smaller number of banks. The problem is downsides vastly outweigh upside so you increase risk when you join two smaller but reasonably stable entities.
Right, though large banks have other affordances: more leverage from both information systems and relationships, as well as control over assets such as real estate and loans access.
What I was pointing out was the arbitrage of collecting cash locally (low risk) whilst seeking low-risk lending opportunities elsewhere. This actually extracts cash from the local community without providing offsetting borrowing opportunities. The community is net worse off.
arbitrage has a more precise meaning than just "you can make money by buying here and then selling there" (otherwise any commerce could be called arbitrage).
the defining characteristic of arbitrage is that it is risk-free. taking deposits and loaning out money is not risk-free (because someone might not pay you back in full), so it's not arbitrage.
using dollars to buy yen cheaply and then selling it back for more dollars in the same transaction is an example of arbitrage.
That doesn't make sense. Both deposit and borrowing opportunities exist at some price. Low risk deposits can be sold at a low price and high risk loans can be bought at a high price. If anything, what a bank naturally would want to do is to sell low risk local deposits, taking the cash to buy high risk loans elsewhere in order to collect the risk premium. The same happens in reverse. There is no inherent reason for money to move net-net, unless there is unequal demand for deposits and borrowing. For a place like Samoa, they probably need more borrowing, so banks wouldn't be extracting any cash, but rather bringing it in.
Bank consolidation is inevitable. Large banks are like nuclear weapons. Every nation absolutely needs them or they risk foreign banks and investors rushing in and capitalizing+colonizing the entire country. So if you don't have large banks you're absolutely at the mercy of those who do (when it comes time to raise capital). But once you have large banks it becomes down right unprofitable to invest in small enterprises. As they say, no tier 1 bank is interested in funding an additional lemonade stand. Go big or go home. There's a feedback loop here that Marx understood quite clearly: capital becomes ever more centralized, ever more efficient, ever more demanding of bigger returns and more capital to invest. This process can be slowed but it cannot be stopped. It is also essential to global trade and our modern way of life. The end result is the undercapitalization of virtually everybody but a select wealthy elite.
But the internet can fix this. It allows for the creation of markets and coordination very, very cheaply. Crowd funding, p2p lending, Youtube, Patreon, open source software, and yes, cryptocurrencies -- these are the key tools of resistance that will allow the little fish to carve out some measure of autonomy. This is the point. Trillions are locked away in the global mega-banks and the bank-likes. Governments across the globe embrace neoliberal policies and actively disinvest in their own people, cutting services and raising fees. Inequality is rising faster and faster, everywhere. What else is there to do? If the proletariat cannot access the private money locked away in the banks and the public money has mysteriously all disappeared then they have no choice but to literally make their own money and seize the means of production. It's this project, the recapitalization of the proletariat, that is the great challenge of the 21st century.
> Bank consolidation is inevitable. Large banks are like nuclear weapons. Every nation absolutely needs them or they risk foreign banks and investors rushing in and capitalizing+colonizing the entire country.
I don't think that makes sense. If you don't allow massively consolidated domestic banks to operate in your country, why would you allow massively consolidated foreign banks to do so instead and "colonize" you?
> But the internet can fix this. It allows for the creation of markets and coordination very, very cheaply. Crowd funding, p2p lending, Youtube, Patreon, open source software, and yes, cryptocurrencies -- these are the key tools of resistance that will allow the little fish to carve out some measure of autonomy.
Personally, I'm moving on from this kind of techno-optimism. I don't think those things can fill these void left by a lack of community banks. Those have their attention focused on their local communities, but your techno-institutions focus their attention on what's attention-grabbing globally. While the latter may be different from what the big banks focus on, it doesn't fix the problems that community banks solve.
> If you don't allow massively consolidated domestic banks to operate in your country, why would you allow massively consolidated foreign banks to do so instead and "colonize" you?
These days if you're a country and you want to grow then you need capital investment. Now that war and conquest and slavery are severely frowned upon there's really no other way to achieve growth but to get some rich <strike>lord</strike> investor to give you a bunch of money on "friendly" terms. (And for the investor class it's all about how "friendly" you are. Countries that are friendly to investors can thrive. Countries that aren't usually get fucked. This is the real reason China is so deeply scary to the global investor class.)
The capital investment needed to sustain growth can either come from domestic sources or foreign sources. Of course if your country has very limited financial infrastructure it basically must come from abroad. Again, for various reasons, as the Cubans have discovered, you can't really self-bootstrap a modern industrial economy. (Unless you're the British Empire and you're willing to go out and conquer half the planet and feed that into your nascent industries. But again this sort of thing is no longer kosher these nowadays.) So you must go begging to the foreign creditors who will demand "friendly" terms not unlike what the British offered eg India.
Note that this dynamic is play even for powerful and developed countries. The reason Britain continues to defend and support and bail out its highly dysfunctional banks is because it knows very well what will happen if those banks collapse. The British private sector will get the capital it desperately needs to grow from foreign banks. And once that happens it would be completely at the mercy of foreign creditors. This is the real reason nations must defend/bailout their banks.
> I don't think those things can fill these void left by a lack of community banks.
There's no such thing as a community bank as you imagine it. You can create mission oriented banks (eg banks focused on some credit-starved minority) but these are rarely profitable in the classical sense. In the end the only "defense" against global banks is to have your own global banks. The only defense against being indebted to foreign creditors is being able to capitalize the majority (50+%) of your own growth.
If we want to give charity to a class of people via subsidizing credit to them, we should be explicit about it rather than putting moral pressure on banks to make sub-optimal loans alongside honestly offered loans.
The idea that the bank is obligated to balance the scales of lending and borrowing seems odd to me as well. I keep a bank account for myself personally of course, and if some day I needed to take a big loan out to start a business I wouldn't consider my decades of having a checking account with the bank as obligating them to extend me the loan regardless of the credit risk they think I am. I voluntarily signed up for a bank account because it's good for me, and if there's nothing in the contract about them having to make me a loan in the future I shouldn't expect one and neither should they.
Lionsion never mentioned charity, moral pressure, or subsidizing credit.
Just as banks should have no moral obligation to make certain loans, neither should specific jurisdictions have an obligation to allow large banks to displace local banks that may better serve their purposes, if they so choose.
You're both right as far as I can see. I don't understand what you're disagreeing with.
I'm not convinced they are in disagreement, they are both making related observations. A good public debate should feel out points of agreement between participants.
A great way to grow a community is to take any excess resources (proxied by money) and reinvest locally. However, if all the members bank with a multinational bank then the money (hence resources) will probably end up in a city in another country. The community won't grow.
If there was a systemic bias (beyond economies of scale) that favors big banks at the expense of community banks, that might squeeze the life out of small productive communities that the banks view as 'high risk' through a lack of knowledge about their circumstances. That would be a problem, but that issue is not related to this thread.
If the foreign cities are just more productive, then hopefully the community members will be better off because they can import enough to make up for the lack of local infrastructure.
> I voluntarily signed up for a bank account because it's good for me, and if there's nothing in the contract about them having to make me a loan in the future I shouldn't expect one and neither should they.
That's libertarian dogma that elides the whole world outside of its narrow logic.
Corporations are ultimately meant to be agents that further the public good. They're not vehicles for the unrestrained pursuit of private profit to the exclusion of all other concerns. If natural economic incentives are not enough to motivate them to act in the interests of the public, then its the job of government and its regulations to compel a solution. To wit: if bank consolidation causes public goods such as community lending to be neglected, then government should forbid bank mergers and break up large banks until it no longer is.
Is subsidizing local debtors at the expense of local creditors really the way yo further the public good?
That looks like a complicated question that does not have a single answer. And a government can spend money with much finer granularity than it can tax or regulate, so it is very likely that letting the banks concentrate (up to reasonable levels) is the correct answer.
Rather than constructing labrythian and usually unintended-consequence-laden incentive schemes to cajole corporations to act in the public good, it’s usually more efficient to facilitate capital’s maximization of profit, tax that profit, and invest it directly in the outcomes you’re trying to achieve. I agree that governments ought to intervene in cases like this, but nowhere is it written that regulation should be the primary tool, or even a tool.
> Corporations are ultimately meant to be agents that further the public good.
Corporations have rarely (if ever) been meant to further public good. They have almost always been for "unrestrained pursuit of profit to the exclusion of all other concerns".
I agree that as soon as they start acting outside public interest they should be reigned in by regulators, the problem is that regulators tend to turn a blind eye when a corporation can pay them to.
> Corporations have rarely (if ever) been meant to further public good.
Sorry, no time for sources, but you might want to research history of limited liability. The whole raison d'etre of corporations is to finance projects that are too risky for unlimited liability but still big enough good for public that public is willing to give limited liability protection to owners. Same applies to IP. The purpose of copyright is not to give/guarantee income to creators, but to facilitate generation of works of art to the benefit of public. For some reason lot of people are confused about these.
> For some reason lot of people are confused about these.
The reason being, their paycheck literally depends on being confused about this :). LLCs and copyrights may be intended for furthering public good, but people starting LLC or exploiting copyright protection are there for their personal profits. The public is, unfortunately, very bad at ensuring the tools created for public good are actually used for public good.
> Corporations have rarely (if ever) been meant to further public good. They have almost always been for "unrestrained pursuit of profit to the exclusion of all other concerns".
That's wrong. Corporations don't have an independent existence; they're legal entities created by law. The laws that allow for corporations were not written to better allow for the "unrestrained pursuit of profit to the exclusion of all other concerns," they were written because corporate legal entities were judged to be beneficial to the common good of the home country.
What they're meant to do is distinct from what will naturally do when their behavior is unchecked.
I think it's somewhat analogous to patents, which are rights created by law for the express purpose of incentivizing invention and encourage eventual public domain use.
What you seem to be suggesting is that everything a corporation may or may not do is a political question to be decided by lawmakers nominally guarding the “common good”.
Where does that leave a corporation like the New York Times, which may wish to publish articles in contravention of lawmakers’ ideas of the common good?
Yes of course they do. Corporations are defined as persons by law, not by the constitution. The congress can easily revoke corporate personhood and the 14th amendment and all of the rest would no longer apply.
If you’re referring to Citizens United, the idea that the decision was based on some technical concept of corporate personhood is basically a myth. Rather, it was based on combining the right of (individual) freedom of speech with another Constitutional right, freedom of association. To quote Wikipedia:
> The majority ruled that the Freedom of the Press clause of the First Amendment protects associations of individuals in addition to individual speakers, and further that the First Amendment does not allow prohibitions of speech based on the identity of the speaker. Corporations, as associations of individuals, therefore have free speech rights under the First Amendment.
If you’re not referring to Citizens United, well, it’s still a relevant precedent that would prevent your plan from working :)
Citizens United can certainly be argued as intellectually consistent. But ugh, it is simultaneously so effective at disempowering citizens who don't control major corporate entities.
Thousands and thousands of us can so easily be shouted down by massive corporations showering money on our representatives.
We want it to be ubiquitous.
We want it to be close to free for retail customers.
We want it to not lose money on underperforming loans.
We want it to extend the social benefits of credit in the community, even if the community is very poor.
We want it to be very closely regulated, so that people never lose their money.
We want opening a bank to cost less than the net present value of all future banking revenue in American Samoa.
It’s really rough satisfying all these wants at the same time.