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.