By Redge Nkosi
RECENTLY there have been several articles and reports, across the media, decrying banks’ practices and behaviour. Society’s disquiet about banks is not new, but appears to be on the increase yet has received little or no attention from authorities.
Tito Mboweni’s recent revelations, carried in the local media, blaming banks for the collapse of the government’s Covid-19 Loan Guarantee Scheme, added to the already negative perceptions about banks.
Such news isn’t shocking to most citizens, perhaps only to President Cyril Ramaphosa who is said to have joined one of the meetings, only to have his plea for more lending rejected. His own organ of state, the SA Reserve Bank (SARB), party to this guarantee scheme, is said to have instructed banks to lend as usual despite the once-in-a-century crisis. Strange. Yet this guarantee was besides the many that banks enjoy from the state.
Prior to returning to the government as finance minister, Mboweni did not have nice words about banks, of which he was a regulator as governor of the SARB. Add to these, racialised bank charges and lending.
Elsewhere, banks are closing accounts of Sekunjalo, a group of firms owned by Dr Iqbal Survé on account of “reputational risk”. This highly amorphous risk management phrase lends itself to all manner of abuse by those who wish to apply it.
Whatever the merits, it is an entanglement that worsens banks’ reputation, inviting more, not less, outrage capable of fertilising the ground for radical regulatory overhaul and scrutiny.
But what are banks? What do banks do? Why do banks behave with total abandon as to invite so much disquiet? Why are regulatory authorities rather indifferent about such behaviour?
Contemporary empirical and theoretical economic literature describes banks as financial firms that intermediate between economic agents. They are seen as passive conduits of monetary policy, channelling savings and lending them out, but also as passive financial portfolio managers. That they also facilitate payments is often regarded as incidental to the banking theory.
This canonical conception of banks and banking has two fundamental errors, with far-reaching implications: that banks are “firms” and that they are financial “intermediaries”. This functional ontology of banks also provides the basis for economic modelling as it grounds the banking regulatory remit.
Like all other firms, banks must, therefore, be subject to the same theories of a “firm”, like shareholder interests, profit maximisation and others. Their behaviour towards their clients and society therefore must be consistent with other firms. Similarly, the authorities that regulate them (the SARB) must produce a regulatory regime that conforms to the theory of firms, though with a sectoral bias of financial intermediation.
With regard to risk management, banks can thus not also deviate from similar approaches as other firms. Lawyers (judges), in their interpretation of what banks are and their role, must similarly view banks from within broad lenses of financial intermediating firms. Importantly, for economic purposes, banks should be analysed with similar microeconomic tools as are employed to analyse other industries.
Sadly, all this is erroneous.
While literature has nomenclatured banks as “firms” with the role of financial “intermediaries” and that these are well entrenched from a legalistic purchase, they are neither ordinary firms nor are they financial intermediaries.
Banks are “institutions”, not firms, and are creators and allocators of money/credit (money supply) and not financial intermediaries as commonly but erroneously received. They are thus charged with two social utility functions of money/credit creation and the proper functioning of the monetary system, of which they are an integral part. They underpin the health of the whole economy.
As institutions central to monetary systems, banks must be and are organically tied to the state through the licence given to them by the state, to perform delegated state duties for its citizens, including financial inclusion, payments systems and related monetary policy functions. As a result, they enjoy a unique privilege of implicit and explicit government (citizen) guarantees of their solvency.
Such privileges are in recognition of the public good nature (institutional character) of banks which are not available to ordinary firms. They are an integral part of fiscal and monetary policies, the state’s primary instruments of economic and strategic statecraft.
Banks can’t, therefore, be conceived outside of the context of state institutions and government policy. Consequently, the public good doctrine applies to banks and for which scholars have popularised the phrase “financial institution”, not “firms”.
Indeed, as the state theory of money asserts, money, itself a social institution, is a creature of the state and only the state (sovereign) has the prerogative to create money. Any such institution as may be licensed to do such a national societal role, like banks are, is therefore performing a state function which must be enjoyed by every citizen on a non-excludable basis, meaning no one can be excluded from its consumption, unless on strong societal grounds (national security concerns) that run counter to statecraft.
Armed with these critical state functions, if not checked, banks can thus easily undermine the macroeconomic management of the economy (as in the loan guarantee scheme, quantity rationing etc), including having pervasive effects on social, political and environmental stability.
There is, therefore, a strong relationship between the current erroneous banking theory and bank regulations. The regulatory failures blamed for the cause of the financial (banking) crisis of 2007/8 demonstrate the corporate bias (banks as firms) approach to banking theory. This prompted changes to banking regulations in the US, UK, EU and elsewhere.
These profoundly crucial facts, while long known by careful economists and some bankers, have recently been acknowledged by all serious central banks and, interestingly, even by the most unrepentant neoclassical (neoliberal) economists.
What is not widely and fully appreciated by most however, are the macroeconomic, legal and other implications of these realities. The current discredited banking theory from which flows current banking policies and regulations impart significant corporate bias into banks as “firms” whereas they are not.
From a macroeconomic perspective, bank behaviour, supported by Treasury and Reserve Bank, is at the centre of not only the highly biased capital accumulation against blacks and therefore the endless poverty and unemployment (on the pretext of risk), but also at the core of the poor economic recovery and the disastrously failed industrialisation.
The Tito/Loan Guarantee complaint, the Sekunjalo bank saga, racialised charges and the extraordinary quantity rationing of credit to blacks and small, micro and medium enterprises (SMMEs) are outcomes of untrammelled “firm” behaviour. Recent research from Stellenbosch University reveals that 19 out of 20 SMMEs are refused finance by banks. This is not just alarming; it has serious negative macroeconomic consequences.
Meanwhile, Treasury and SARB macro models do not feature money or banks. Where they fortuitously do, they treat banks as passive “firms" passing savings to investors. Incompetent modelling indeed.
The institutional nature of this network industry (banks) and the profound social and macroeconomic significance of its money creation and allocation powers, informed my call for urgent and sweeping bank reforms (structural and non-structural) in my May 2017 presentation to Parliament.
Unless circumscribed, banks as receivers of public goods privilege, will themselves continue to be creators of public (social) disquiet, economic disenfranchisement, and macroeconomic instability.
Redge Nkosi is the executive director and Research Head, Money, Banking and Macroeconomics at Firstsource Money and founding executive board member of the London-based Monetary Reform International.