Are Banks Special? Is this a Rhetorical Question?
‘Are banks special?’ This was the most fundamental question raised by the 2007 financial crisis. It remains just as relevant today especially given the prevailing Covid-19 pandemic. To any seasoned banker, the answer will automatically be “yes.” But let’s examine the question of the specialness of banks so that the reader can decide for himself/herself.
If banks are ‘special’ as compared with other firms, what does this imply for whether and how banks should be regulated; the respective corporate governance arrangements for banks; and the required standards of professionalism and corporate responsibility expected of bankers and their banks ? We might argue pragmatically that banks are ‘special’ because they are more heavily regulated than many other kinds of firm and several bank-type regulations (like capital adequacy, reserve requirements, provisioning for impaired credit, approval of management members, compulsory reporting of quarterly financial statements) are atypical ones for banking.
In the global arena, we also observe that banks are special because of the ‘too big to fail’ doctrine. Very big and important banks are invariably bailed out one way or another by the state if they get into serious difficulties. Recent financial crisis indicate that when the banking system retrenches, the real economy suffers tremendously. Arguably, all of these empirical observations conspire and lend themselves to make…
