Banking and Payments After the Great Recession: Learning from HistoryKevin Mellyn |
“Hegel remarks somewhere ‘all great world-historic facts …appear twice’; he forgot to add the first time as tragedy, the second time as farce”
- Karl Marx, Eighteenth Brumaire of Louis Bonaparte, 1852
Want to know what’s going to happen to banking and payments? Follow financial history. We have lived through this before as a tragedy. With luck, this time will be more of a farce.
History never quite repeats itself but, as Mark Twain paraphrased Marx, it does rhyme. The market controls money in good times but governments gain control when markets falter.
The first Great Depression started in 1929 as a panic on Wall Street but a crisis in much of Europe’s banking system and public finances in 1931-32 made recovery impossible. By early 1933, the U.S. banks were collapsing and President Franklin D. Roosevelt shut them down in a “bank holiday,” after which thousands did not reopen. The Banking Act of 1933 separated commercial banking from investment banking and imposed a utility model with strict product and interest rate controls on the former.
The current financial reform agenda in the United States, United Kingdom, and Europe is a rerun of the 1930’s, with governments determined to make banking safe. We are going back eighty years to utility banking. The trigger once again will likely be a European banking crisis rooted in public finances. Given the fragile institutional underpinning of the Euro, the tools to contain this crisis just don’t exist. This means that the only way out is probably for governments to continue muddling through by consolidating and recapitalizing the banks and, in return, greatly curbing their ways of making money. Japan went through something similar in the 1990s.
The key point is that banking is not going back to business as usual because the rules have changed and will stay changed for a long time. Classic lending and transaction banking for corporations and institutions will increase in importance relative to retail banking.
What’s important in such an environment are network and technology assets—as well as credibility and trust, which give broad scope to drive the new business models that will grow up around utility banking to meet real customer needs that won’t go away.
Topics: Economic Outlook