Wednesday, October 15

Banking on the community

One thing is certain; things will never be the same. The model of Wall Street investment banking is no longer viable. None of the previous top 5 Investment Banks now exist, except Goldman Sachs which is now operates as a traditional bank within regulatory constraints. Whilst excessive compensation has not been eliminated its means has been curtailed since borrowing capacity has been reduced by 67% as average leverages reduce from 30 to 10, a principal driver in credit markets turmoil.

Future banking is now more of the old garden variety of taking deposits and lending them back at higher rate of interest, augmented by banking services.

Hence the successful model of the mutualised local bank, where local communities own the bank and lend locally can flourish in a similar way to the big banks whose global services will continue to service the larger populated areas. I see no reason why the mutualistion process for banks will not accelerate and particularly in the developing world such as China. Maybe as the Chinese economy is pausing for breath, due to the tightening of the government’s monetary policy, it might be well advised to consider alternative models available.

A good example in Australia of a viable alternative is the Bandito Bank which operates 350 branches, with over 220+ Community Bank branches, the latter 100% owned by each local community. These community banks pay modest fees for their infrastructure and systems support but take full responsibility for loan approvals and the integrity of all of the banking services.

How does it work?

Let’s say I am part of a community which is not serviced by one of the big banks and I have to drive to the nearest regional centre for banking requirements. After a meeting you find there are many people willing to invest the minimum of $1,000 each for a shareholding and a few willing to outlay say $10,000 which soon adds up to the requirement to raise say at least $ 300,000 for it to become a viable local bank.
The next step is to incorporate the Company, set up the facilities, recruits staff and soon you’re open for business.
The bank can undertake all of the traditional banking services using existing banking infrastructure but the owners (the community) take responsibility for its integrity and services.
It’s banking on the community.

The same principals apply to just about every activity where a service is required, the incorporated mutual venture can set up a secretariat or administarion and leverage from the infrastructure already created by the larger entities. It means like minded folk of modest means can prosper through local co operatives where they are not represented or poorly serviced by the larger institutions.


Cart said...

Thanks Lindsay. As usual you take the issue way beyond my limited understanding, but still manage to keep it clear and understandable. Your mention of China and the wider potential of mutualistion reminded me of a earlier similar approaches. In the 1980s Spain, like elsewhere, had a ballooning unemployment problem. The approach there was to establish community co-operatives to assist with infrastructure and networks for individual enterprises. I guess the same goes for the village banks in Bangladesh and India.

Gary said...

Hi Lindsay,

Do you have credit unions in Australia? Our local credit union is a cooperative that is extremely successful. It only cost $25.00 for a share to join. It donates lots of money back into the community, is run by an elected board from the members... and competes with the big banks in terms of services.

Seraphine said...

i love the idea of community banks. don't forget, though, that local banks can be just as aggressively managed as any other bank.
also, investment banks aren't dead. they'll reconfigure their business models because they perform an important function in a capitalist society: they raise and allocate capital more efficiently than government can.
ummm... most of the time, theoretically.
i love the business model of that australian banking company. it's called 'franchising' and has been used successfully for over 50 years by mcdonalds.

Zee said...

I don't believe the label "franchising" is appropriate for the community banking as described here.
Isn't a "franchise" a brand, or a name you lease or buy - and you are restricted to hold true to all the guidelines and product handling rules the "mother-company" will dictate?

lindsaylobe said...

Hi Cart. Gary, Sera & Zee
Thank for your comments.
Cart-That’s true about the application to those countries, although in my opinion the interest rate and administration has been far too high for the so called ‘micro banking’.
Gary - Credit unions are popular and widespread over here.
Sera -thanks for your thoughtful comments but _ I’m not sure I know what you mean by your comment - investment banks aren't dead. They’ll reconfigure their business models because they perform an important function in a capitalist society: they raise and allocate capital more efficiently than government can.
I will attempt to summarize what I mean which hopefully will explain why I think the issue is not as clear cut as your comment suggests.
First of all what do you mean by capital markets? The standard definition as I understand it and use that term is to denote the share and Bond market for securities where both companies and the government can raise funds. The share market is where public companies can raise capital by the issue of shares and convertible notes and so on which are subsequently traded. Similarly the Bond market is where both government and companies can raise funds. Equity can also be privately raised with the private or non public market.
Goldman Sachs announced (after they received their banking license) that they thought the model of the Wall Street banker was over and I agree with them. I think it’s also true for a large number of investment banks who all used leveraging principles. But there are many other current institutions and financiers, including separate divisions within all of the traditional banks that support the capital markets. The process begins with the companies or businesses themselves assisted by their advisors and financiers. On a smaller scale the community bank assists local business and their record has been exemplary in lending and in the provision of banking services to the community. Its helps when your customers are better known and part of your community and those perusing the loan applications are usually prudent and responsible. ! But it's essentially no different to a larger bank assisting businesses.
Franchise operations I understand are popular in both countries and owning a Mc Donald’s franchise over here has been very profitable and successful for those involved. But it’s not really community banking, although a McDonald’s franchisee would find any bank very keen to have their business.
I like your succinct definition; it’s definitely not community banking.
Best wishes

Seraphine said...

a franchise basically offers a central framework for the franchisee to work with. but you're right, a typical franchise will distribute products (and a brand name) through the franchisee too.
investment banks will not only take companies public and raise money through stock and bond offerings, they will also take equity and bond or partnership positions themselves. as such, they are typically higher leveraged than traditional banks and take more creative risk. they acquire funds for companies and governments, and typically don't take customer deposits directly. i think they'll survive, some of them, but their gearing won't be the 30-40x equity seen in recent years.

Cart said...

I still think mutualistion, in a broad sense, offers a base for a replacement for the capitalism which has continued to cripple us. We go a long way back – well through the industrial revolution at least – with efforts to establish mutually efficacious results. I expect it goes back beyond that.
Yes Lindsay, under the current paradigm you are right. I’m inclined to think that we really need to move beyond that limited design to a point where there an easily, demonstrably cause and effect from our individual actions.
Mind you, cynical as it sounds and with more evidence based information than pleases me, I don’t have much faith in the cause and effect motive either. I guess it is still down to ‘how can I score personally?”

Anonymous said...

I think I actually sort of understand this now! Thanks for taking the time to explain all of this. You make it very understandable.

I just finished listening to Alan Greenberg (Chairman of Bear Stearns before it went under). He says investment banking is dead because it can't withstand rumors. It's not a viable option for the future so is a thing of the past.

The future model is banks and banks that own banks.