Bank Street should be kept dull in order to keep Main Street safe
An insight into Boring Banking
ONE of the more influential ideas, one that has generated a vigorous debate, has been the thesis put forward by the noted economist and Nobel Laureate Paul Krugman that the way to reform banking is to once again make it boring.
Taking a long term historical view, Krugman argues that there is a negative correlation between the ‘business model' of banking and economic stability. Whenever banking got exciting and interesting, paid well and attracted intellectual talent, it got way out of hand and jeopardized the stability of the real sector. Conversely, periods when banking was dull and boring were also periods of economic progress.
To support his thesis, Krugman divides American banking over the past century into three phases. The first phase is the period before 1930, before the Great Depression, when banking was an exciting and expanding industry. Bankers were paid better than in other sectors and therefore banking attracted talent, nurtured ingenuity and promoted innovation. The second phase was the period following the Great Depression when banking was tightly regulated, far less adventurous and decidedly less lucrative - in other words banking became boring. Curiously, this period of boring banking coincided with a period of spectacular progress. The third phase, beginning the 1980s, saw the loosening of regulation yielding space for innovation and expansion. Banking became, once again, exciting and high paying. Much of the seeming success during this period, according to Krugman, was an illusion; and the business model of banking of this period had actually threatened the stability of the real sector. Krugman's surmise accordingly is that the bank street should be kept dull in order to keep the main street safe.
Is ‘Boring' Banking a Necessary and Sufficient Solution?
RBI Governor Subba Rao does not think so. Addressing the International Finance and Banking Conference organized by the Indian Merchants' Chamber yesterday he said,
The ills of the banking system listed above raise two follow-on questions. Is making banking boring in the sense that Krugman indicated a necessary and sufficient solution to curing those ills and preventing their recurrence? And what will be the cost of making boring? Both questions cause much confusion, the first because it has too many answers and the second because it has too few. Abstracting from these answers, I will argue that it is neither possible nor desirable to make banking boring.
3-6-3 banking:
The narrow banking of the 1950s and 1960s was presumably safe and boring. But that was in a far simpler world when economies were largely national, competition was sparse, pressure for innovation was low, and reward for it even lower. Bankers of the time, it is said, worked on a 3 - 6 - 3 formula: pay depositors 3 per cent interest, lend money at 6 per cent and head off to the golf course at 3 pm. From the 24/7/365 perspective of today, that may appear romantic but is hardly practical.
In fact, I will go further and argue that boring banking is an oxymoron in the Indian case. Here my intent is to argue not so much from the perspective of a banking model - narrow or full service - but from the perspective of the challenges that Indian banks will have to meet. Meeting these challenges is going to demand lateral thinking, entrepreneurship and management calibre - all a far cry from anything like boring.
This is a challenge that will test ingenuity, perseverance, ability to learn and adapt and management skills. And this is going to be anything but boring.