Category: Analysis

Banking: Successes and Failures

The lecture under analysis is given by Robert J. Shiller, professor in the Department of Economics at Yale University. The name of the lecture is “Banking: Successes and Failures”. The lecture was given on March, 2008 and published on October 7, 2009. In this lecture, the professor touches upon such questions as the role of banks in people’s life and their influence on the decisions and processes that result from their actions.

Robert J. Shiller talks about the banks that were created long time ago, the first banks that were built by goldsmiths. The first saving banks were established in the 19th century. They gave people the possibility to save their money in small amounts because the people who saved money and kept them in their houses were mostly not protected from burglaries. This type of banks came to the United States from the United Kingdom. He points out that the power of banks was immense at that time because of interference of the banking system into all spheres of people’s life, for example, information and technology system. Numerous investment programs, recourses and treasure deposits made banks the central economic institutions. The public actions and the whole life of the society were directly dependent on banks although they were in their primitive state.

Types of Banking Institutions

Professor Robert J. Shiller mentions the main types of banking institutions. They are as follows: credit unions, saving and loan associations and commercial banks. He gives the statistics of the main monetary resources that belong to every of these institutions and states that in spite of the great popularity of credit unions and their advertising programs, they are not the most important ones. The most influential banking institutions are commercial banks.

Fundamental Factors of Banks’ Existence

Shiller points out three fundamental factors of banks’ existence. The first one is adverse selection, which means that there should exist a wide range of banks to enable one to choose the right one and decide whether they should deposit or invest or get a loan to start a business. Moral hazard is another problem which refers to clients’ confidence in bank stability. Liquidity is the ability of the bank to pay the money back to its clients.

Playing Golf

One of the most interesting things about trusting the bank is playing golf. If one wants to be a banker, the right thing for him to do is to join a golf club in order to keep abreast of all the events and gossips because some of this information may be quite useful to know when a person runs a bank business. There are some problems with lending money but the fact of relationship banking is an important method of  protection from insecure contracts and loans.

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Crises

The next question that is brought up during the lecture is the series of crises that took place in different countries like Argentina, Mexico and others. The main point of banks’ activity is giving loans, borrowing funds for long periods. These are the main sources of revenue for banks. Sometimes banks can face numerous problems like bank runs; the professor gave a lot of examples to prove this fact, like the bank runs that took place at the Bank of England, which was the first bank run in the UK since 1966. Another problem is insolvency.

In general, there are several ways to help banks to gain confidence of their investors and depositors by governmental help, control and regulation. The system of this kind was created by the Basel Accord and some other rating agencies. They are crucial for the reputation of a bank they support. The lecture provides interesting information regarding the history of banks and enhances students’ understanding of the fundamental categories and terms.

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