/ world as we speak information/ On the finish of final 12 months, the well-known worldwide consulting firm “McKinsey” launched the following annual assessment of the banking world for 2019 below the catchy title: “Final cease for repairs? The final pit cease? Time for daring late-cycle strikes.
The assessments and predictions of this paper are harsh and surprising. The ten years for the reason that international monetary disaster of 2008-2009 have seen a gradual weakening of banks world wide: earnings are declining and even turning into losses, return on capital is falling, development charges of mortgage portfolios are beginning to lag even modest charges of GDP development. In 2018, world GDP development in nominal phrases was 5.9%, whereas loans elevated by solely 4.4%.
The disaster of 2008-2009 didn’t result in the restoration of the proportions disturbed within the financial system and finance. The financial system entered the brand new decade in a state of despair. Everybody was ready for the standard revival, but it surely by no means got here. Central banks have tried to revive the financial system by decreasing key rates of interest, however that is like injecting a affected person with morphine: a couple of injections might be given, however the affected person can’t be drugged completely.
And we see that for a decade central banks have saved their key rates of interest extraordinarily low. Some central banks (in Denmark, Sweden, Switzerland, Japan) lowered it even beneath zero. And the US Federal Reserve saved the important thing rate of interest at 0-0.25% from late 2008 to late 2015. After a slight enhance, it fell again to 0-0.25%. Since 2016, the ECB’s OLP has been secure at zero. All this was completed to revive the financial system, however, we repeat, there is no such thing as a revival. However the banking system confronted severe issues: rates of interest on lively (credit score) and passive (deposit) operations grew to become extraordinarily low. It grew to become troublesome to make a revenue on the expense of interest-bearing operations. Earnings within the type of commissions started to play an more and more essential function. In some nations (Switzerland, Germany, the Netherlands, Denmark) banks have began to set adverse rates of interest on deposits. This typically creates a danger of destruction of the banking system, as a result of deposits are the idea on which the mechanism of manufacturing of unavailable (deposit) cash by business banks is constructed. Based on Deutsche Financial institution’s estimates, credit score establishments within the Eurozone lose eight billion {dollars} a 12 months because of adverse rates of interest. “Truly, banks are penalized for holding free money on deposit with the Central Financial institution,” says McKinsey.
Hardly on the primary web page of the McKinsey assessment lies the catchy abstract of the research: solely 40% of banking organizations on the earth create worth, and 60% destroy it. This phrase signifies that solely two-fifths of all banks are worthwhile, and three-fifths are unprofitable. The final to finish chapter, can accumulate losses for a few years, many stay afloat because of reorganizations, i.e. money injections from central banks or states. Damages and losses are absolutely found solely in the course of the chapter part and are finally borne by the complete society (via taxes, elevated inflation, direct losses of failed financial institution depositors, and so on.).
The information from the “McKinsey” survey, displaying the lack of profitability on the a part of the banks, is just not surprising. Based on the ECB, each second financial institution has a return on fairness decrease than the price of elevating fairness capital. Because of this it’s troublesome for banks to boost capital, each via issuing shares and thru earnings.
Whether or not banks belong to the primary or second group (worth creation and destruction) will depend on various elements. Initially, from the facet of the banks. For instance, within the US, the return on financial institution capital is 10% decrease than amongst European banks. An essential issue is the dimensions of the financial institution. Within the first group of banks, roughly half (20% of the full variety of banks on the earth), earn the lion’s share of all of the earnings of the banking world, and virtually all of them belong to the class of huge and largest banks. The extra capital and belongings, the upper the profitability. Nevertheless, the assessment authors don’t discover America right here. Such dependence has all the time been there, it’s common. Concerning the processes of focus and centralization of capital typically and banking specifically, Karl Marx wrote in “Capital”, and in addition Lenin in “Imperialism as the best diploma of capitalism”. The German Social Democrat Rudolf Hilferding additionally wrote in his seminal work Finance Capital (1910. Thought of one of many biggest Marxist works on economics since Capital).
It’s doable to interpret the estimates contained within the report in several methods, however it’s apparent that no less than half of all banks on the earth are doomed. What does the dying of a financial institution imply? Both it’s the full liquidation of the financial institution because of its chapter, or its takeover by a bigger and extra aggressive financial institution. In the present day, high-tech corporations that develop digital currencies and quick cost providers are already competing with banks. They’re conquering the market with hundreds of thousands of consumers who beforehand used the providers of conventional banking organizations. A few of as we speak’s banks attempt to compete with high-tech corporations, others favor to enter into cooperation agreements with them, generally mergers occur.
The authors of the report trace to the banks that they’ve little or no time left for decisive motion, as all of the indicators of a large-scale disaster have ripened within the international financial system. The report was printed three months earlier than the beginning of the coronavirus pandemic, which was not the primary reason behind the disaster, however grew to become its set off, in addition to a smoke display screen to cover the actual causes of the disaster.
By “decisive actions” the creator understands no less than three varieties of actions. An important factor is to boldly transfer to new applied sciences, primarily digital. As well as, banks ought to be consolidated via mergers. McKinsey emphasizes: “Sooner or later, measurement will seemingly imply extra as banks transfer nearer to a technological arms race.” Lastly, banks shouldn’t be ashamed of a wider use of outsourcing, that’s, transferring minor duties to different corporations, lowering prices.
There’s one other menace to the existence of banks, which isn’t taken into consideration by McKinsey, however whose significance will enhance within the close to future. I already wrote that central banks this 12 months sharply elevated their efforts to introduce official digital currencies. The leaders listed here are the Folks’s Financial institution of China, the central banks of Sweden, South Korea and Thailand. This 12 months, the US Federal Reserve joined the digital race. One of many predominant objectives of central banks introducing their digital currencies is to switch money with these currencies. Thus, central banks will attempt to shut the banking system to people who begin withdrawing cash from financial institution deposits.
By the best way, the demand for money has additionally elevated sharply from banks, which save their cash positioned within the accounts of Central Banks from curiosity depreciation, turning it into money. Banks shouldn’t have their very own safes; they use the providers of particular money registers. This course of is especially evident in Germany, the place there are not sufficient specifically outfitted warehouses to retailer financial institution money. After the ECB’s rate of interest was reduce to zero in 2016, Germany’s banks’ money reserves rose sharply. By the top of 2019, that they had tripled and reached a historic document of 43.4 billion euros, based on Bloomberg. In bodily phrases, that is 442 tonnes in €100 notes, 800 tonnes in €50 notes and 1,700 if €20 notes are used.
The transfer to switch money with digital forex seems to be designed to cease the onset of the collapse of the business banking system. Nevertheless, it seems that such a “rescue operation” may destroy business banks even quicker, as a result of they’d lose their conventional perform of middleman between the central financial institution and people. The issuance of digital cash in alternate for paper tokens (banknotes) implies that demand deposit accounts will likely be opened for people on the central financial institution. Industrial banks on this scheme are a redundant hyperlink.
That is the conclusion reached by the authors of the report of the Federal Reserve Financial institution of Philadelphia “Central Financial institution Digital Forex: Central Banking for All?”
The service of the inhabitants can utterly move to the central banks, which for contemporary man appears uncommon. Virtually not one of the people straight contacted the central financial institution, however within the case of the introduction of official digital currencies, they must. By the best way, it was once like that within the distant previous. For instance, within the oldest central financial institution – the Financial institution of England (established in 1694), at the start of its exercise it opened accounts for essential and rich residents. It’s mentioned that this was additionally the case within the First and Second Banks of the USA (they existed on the finish of the XVIII – the primary many years of the XIX centuries, they had been the predecessors of the Federal Reserve of the USA). The Philadelphia report hinted that business banks had outlived their time, and within the age of numbers, all issues referring to the problem of cash and the service of the inhabitants and enterprise may very well be taken over by central banks. Digital applied sciences will permit them to handle hundreds of thousands and hundreds of thousands of accounts of people and entities. The McKinsey report speaks of the inevitability of the focus and centralization of capital within the non-public banking sector, that’s, the sharp discount within the variety of non-public banks. The report by the Federal Reserve Financial institution of Philadelphia indicated the potential of the whole disappearance of economic banks. I believe the primary situation is a matter of the close to future. As for the second situation, it may be applied later.
Postscript: Initially of the 20 th century, there have been full of life discussions amongst Marxists on the problems of focus and centralization of capital and the creation of monopolies in numerous areas of the financial system, together with banking. Karl Kautsky believes that this course of will proceed till there is just one group left within the related sector – a supermonopoly (“Extremely-imperialism”, 1914). The German means absolute world monopoly. Lenin in “Imperialism because the Highest Stage of Capitalism” (1916) sharply criticized this place of Kautsky, saying that earlier than monopolization reaches its closing level (creating an absolute monopoly), the contradictions of capitalism will likely be so acute that he’ll fall by then.
Will the method of focus and centralization of financial institution capital reach reaching the purpose the place all business banks will disappear and just one financial institution will stay, known as the Central Financial institution? And never even inside a rustic, however on a worldwide scale (“International Central Financial institution”)? Or will it not occur as a result of capitalism will actually collapse by then? I’ve written greater than as soon as that as we speak there are too many indicators that capitalism resides its final days. And the persistent banking disaster of the final decade testifies to this. The world is coming into an period of post-capitalism. Will there be banks? Let’s discuss that subsequent time.
Translation: V. Sergeev
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