Given all of the problems in the banking industry, major changes are sorely needed.
A recent Gallup poll is confirming what most already know: that Americans hate the banking industry. Only 28% have a lot of confidence in banks, down from the dismal 40% average for banks over the last 35 years (compared to 67% for small business). There are macro and micro reasons for this.
On the macro side, Americans are still unhappy about having to bail out the “too big to fail” big banks for their risky behavior that helped caused the Financial Crisis and Great Recession.
And their behavior since the bailout seems to have gotten worse, not better.
Recall some of the recent big banking scandals: rogue traders (UBS) and the “London Whale” (JP Morgan Chase), discrimination (Wells Fargo), money laundering (HSBC), illegal transactions with banned countries (Standard Chartered), “foreclosuregate” (JP Morgan Chase, Bank of America), and manipulation of LIBOR, foreign exchange, and gold prices.
On the micro side, 43% of all Americans do not plan on putting their savings in a bank account.
Why? Because they lack of trust in banks. There is also the issue of paying the bank fees to use your own money while they invest your money for their profit. Further, the traditional business model of loans based on fractional reserve banking appears to be going the way of the dodo bird. Loans are so hard to get from the big banks that it seems like they are being made to only those who do not need them. Local banks and alternative financial service companies are filling in the gap.
Big banks can earn trust back but it is unlikely. Their priority should be providing value to their customers with bank profits to shareholders a good byproduct instead of the other way around. And providing more transparency and staying on the right side of the law would improve trust. But left to their own devices, oligopolies have little motivation for change given their crony capitalism relationships, which give them favor over their competition.
The current approach to reforming the banking industry has been through government regulation is not working. With tough laws passed (Dodd-Frank), new regulatory agencies (Consumer Finance Protection Bureau), and prosecutions with big fines and penalties, the result has been that “too big to fail” banks have gotten even bigger.
What the banking industry needs is a good dose of competition. Make it easier for regional and local banks to provide the needed competition to big banks by changing the burdensome regulations and compliance issues that hamper them.
Regulate bitcoin differently than banks to provide an alternative to a bank’s savings and checking accounts. Once customers have viable alternatives to the big banks and start to leave in droves, that will force the big banks to change or become wards of the state.
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