Banking is in crisis. It is not just Bangladesh being symptomatic of entry level problems bank face today, such as the high non-performing-loan (NPL) proportion masking, as it does, compromised collaterals, a weak recovery structure, and the typical bail-out formula retaining the old, unworkable system. At a more advanced level, with countries, for example, experiencing sector-based shifts from manufacturing to services, or from a low-level service to complicated ones, banks are simply being bypassed for other financial intermediaries because trust has ebbed, the availability of more flexible arrangements capped by, at least initially, lower rates, and transactions projecting a face, more friendliness, and limitless finances.
Both these country-specific and secular shifts in the lending-borrowing nexus have not only rocked typical business corporations, but increasingly also being shaped by corporate behaviour becoming more lean, mean, and superficially clean. In short, a new culture may be emerging that could one day make banks look in the transaction business very much like the dial-tone telephone appears in long-distance communications today.
One catalytic factor was the Great Recession of 2008-11, while one of the major consequences has been the rise of the private equity firms challenging banks. In between, as we observe almost every day today, major banks posting sluggish performances even if the overall economy is vibrant, corporations seeking external business compromises so many traditional practices struggle to remain viable, the corresponding growth of wildcard ventures that traditional banking would have shunned, and the advent of artificial intelligence (AI) that does away with traditional banking at the elementary levels, at any rate.
Richard Farley of Kramer Levin Naftalis & Frankel LLP dubbed the Great Recession a 'seismic change'. Triggered in part by over-leveraged lending, in particularly to property developers through subprime mortgages, the Great Recession involved such a banking meltdown that trust in traditional banks dimmed. Or they themselves plunged into crisis, necessitating massive bailouts. The US FDIC (Federal Deposit Insurance Corporation) shuttered 465 banks during the Great Recession (but only 10 in the five previous years). Lehman Brothers collapsed, but Bank of America Merril Lynch, AIG, Freddie Mac, Fannie Mae, and Royal Bank of Scotland were among those close to collapse. One must be cautious in drawing the line here with private equity firms: some, such as Goldman Sachs, began shifting heavily from struggling investment banking towards more lucrative private equity operations from a year or so ago after a few years of tentative shifts in that direction. Yet the brunt of public wrath (and public bailouts) went towards banks.
That was significant enough to attract unknown lenders, like the private equity firms. Many were managing large corporations, but slipping into banking was not difficult. Especially so since small- and mid-sized corporations needed money more than remain strapped by all the bank regulations. They flocked to these equity firms, and the floodgates of a new type of lending-borrowing opened up.
Fund-seekers, for example, were few and far in between during the Great Recession: during 2008-12 there were only 85 of them, 19 being first-timers; but during 2013-17 that climbed to 322, of which 71 were first-timers (see Miriam Gottfried & Rachel Louise Ensign, Wall Street Journal, August 12, 2018). In 2012, for example, the volume of loans was modest, barely $300 billion; but five years later that expanded to half a trillion.
Not surprisingly, big banks have taken a hit even in resurgent economic times. Since the Great Recession, 63 US banks failed, 24 in 2013, and though this fell to only five in 2016, the next year eight more fell, indicating the wavering, indeed, lost confidence. This does matter for borrowers or stock-borrowers: if the future shadow does not look bright, why invest any trust (meaning, money)? We have come a long way since trust was first associated with transactions: when China introduced paper money ('flying cash') at the turn of the 9th century. Traditionally measured through the value of currency, as determined by the government, we can see today how even that is being challenged by (a) crypto-currencies (over a thousand already exist); and (b) artificial intelligence permitting non-cash payments, for example, using eye-colour, facial recognition, fintech (financial technology), all of which eliminate bank-fees and other service charges, while encouraging all kinds of lenders, both monstrous and minute.
One consequence has been to encourage wildcard ventures: anything goes within a neo-liberal order since governmental intervention is reduced to the minimal, but a neo-liberal order without banks opens up unthinkable gateways into the most preposterous investment arenas. Crypto-currency initiation may be a glaring example of the possibilities of what can be done.
Decentralising trust, of course, makes the future more fickle. Yet this is precisely what stock-brokers thrive upon, buying and selling stocks, based on how long that future shadow stretched, keeping an eye if governmental bonds or securities may yield greater returns, and so forth.
Back to Bangladesh, with more than half a dozen mega-projects being publicly financed, it is not whether this poor country can cough up the cash, but whether non-performing loans become the minefield to blow every project apart (or, as is more common, delay completion, even fabricate frills to inflate expenses). As an English-language contemporary editorialised on December 18, 2017, with TK 800 billion (80,000 crores) of defaulted loans, a bulk of which were by nine banks created after 2013, "banks, especially state-owned ones, are disorganised and corrupt," burdening "the meagre three million tax-payers," in a country of 165 million, "whose backs are already breaking under . . . inflation and a myriad other ripple effects.'
Trust must be restored faster than AI contraptions can seduce us away. Put another way, strengthen that trust among borrowers and lenders locally to be able to handle externally-imposed AI intervention. It is a message worth global circulation as well.
Dr. Imtiaz A. Hussain is Professor & Head of the newly-built Department of Global Studies & Governance at Independent University, Bangladesh.