Finanzas corporativas

The business of banking
Oct 28th 1999
From The Economist print edition

Banks have been at the heart of economic activity for eight centuries. In this, the second of our schools briefs on the world of finance, we explain why banks evolved, how they function, what they do, and the challenges they face

WHEN asked why he had robbed a bank, Willie Sutton, a 19th-century American outlaw,replied: “Because that’s where the money is.” His reasoning is hard to fault: since modern banking emerged in 12th-century Genoa, banks and money have gone hand in hand.
Banks are still pre-eminent in the financial system, although other financial intermediaries are growing in importance. First, they are vital to economic activity, because they reallocate money, or credit, from savers, who have atemporary surplus of it, to borrowers, who can make better use of it.
Second, banks are at the heart of the clearing system. By collaborating to clear payments, they help individuals and firms fulfil transactions. Payments can take the form of money orders, cheques or regular transfers, such as standing orders and direct-debit mandates.
Banks take in money as deposits, on which they sometimes payinterest, and then lend it to borrowers, who use it to finance investment or consumption. They also borrow money in other ways, generally from other banks in what is called the interbank market. They make profits on the difference, called the margin or the spread, between interest paid and received. As this spread has been driven down by better information and the increasing sophistication of capitalmarkets, banks have tried to boost their profits with fee businesses, such as selling mutual funds. Such income now accounts for 40% of bank profits in America.
Deposits are banks’ liabilities. They come in two forms: current accounts (in America, checking accounts), on which cheques can be drawn and on which funds are payable immediately on demand; and deposit or savings accounts. Some depositaccounts have notice periods before money can be withdrawn: these are known as time deposits or notice accounts. The interest rate paid on such accounts is generally higher than on demand deposits, from which money can be immediately withdrawn.
Banks’ assets also range between short-term credit, such as overdrafts or credit lines, which can be called in by the bank at little notice, andlonger-term loans, for example to buy a house, or capital equipment, which may be repaid over tens of years. Most of a bank’s liabilities have a shorter maturity than its assets.
There is, therefore, a mismatch between the two. This leads to problems if depositors become so worried about the quality of a bank’s lending book that they demand their savings back. Although some overdrafts or credit lines caneasily be called in, longer-term loans are much less liquid. This “maturity transformation” can cause a bank to fail.
A more common danger is credit risk: the possibility that borrowers will be unable to repay their loans. This risk tends to mount in periods of prosperity, when banks relax their lending criteria, only to become apparent when recession strikes. In the late 1980s, for example,Japanese banks, seduced by the country’s apparent economic invincibility, lent masses of money to high-risk firms, many of which later went bust. Some banks followed them into bankruptcy; the rest are still hobbled.
A third threat to banks is interest-rate risk. This is the possibility that a bank will pay more interest on deposits than it is able to charge for loans. It exists because interest onloans is often set at a fixed rate, whereas rates on deposits are generally variable. This disparity destroyed much of America’s savings-and-loan (thrifts) industry. When interest rates rose sharply in 1979 the S&Ls found themselves paying depositors more than they were earning on their loans. The government eventually had to bail out or close much of the industry.
One way around this is to lend...