Imagine a scenario where you don’t have money on you but you need money to buy your dinner. What do you do? Most people will go to the bank and withdraw money from their checking account. Banks are common in our modern society but most people don’t know their roles in society. Most people think banks as a place to withdraw or deposit their money in. There’s more to this than meets the eye. Banks have a lot of functions that shape up the society. Some people will argue banks are too powerful and should be less powerful.
Banks are common places in the world. The most common bank is a commercial bank; their primary function is to allow customers to withdraw/deposit money from their bank account. Banks play a huge role in our government by giving loans to government agencies and protecting the common people wealth. Banks are a more special kind of intermediaries for our society. Compared to other intermediaries, there are different protocols and regulations for banks (Freixas and Rochet, 1997). Biagio Bossone, the author, believes banks have too much power. He states that banks need to have some power removed from them for the better of society. One special function of a bank is the ability to gain trust from people (Diamond 1984). Most people trust the banks and are willing to give their personal information. In our current generation, knowledge is essential to people. By giving banks your money, the banks can make estimations of your net values. Also, another special function of a bank is the ability to create money out of thin air (Terlizzese,1988). To explain this function, it means that banks can make money by increasing their liabilities. A liability is an account where the company owes loaners money. Another way banks can produce money is giving investors a loan from people’s saving account (Schumpeter, 1934). Banks are the only intermediaries to execute the function. Banks make most of their revenue from interest rates when giving loans to people. The author argues that taking money from people’s saving accounts is evil because the saver can lose their money. If the loaners don’t pay back the banks, the bank is going to lose money. This is one of the reasons why the Great Depression happens. Banks made risky loans to investors without doing any background checks during the depression. People who put money in the banks during the Great Depression were unable to withdraw their money because the bank ran out of the money. This function is too powerful and it could lead to corruption in the future. Another special function of the bank is the ability to control some aspects of the economy. The public banks work with each other and have a great impact on the economy by dictating the interest rate. Banks help each other by either loaning cash or taking debts from other banks. Banks demand a lot of power and responsibility to care for. The author states the ability to back each other out will also lead to corruption and doesn’t provide the general safety of the public. Banks have too much power and need to be limited.
In my opinion, banks have too much power in the world. Based on my analysis, many people trust banks as a positive aspect of their life. Banks help people feel comfortable in their life because they are common to find in the world. Banks are financial institutions that help people with their issues. Banks have a long history in our culture; it’s a place where many people trusted with their money. While I believed that, banks show signs of corruptions in our society. When the housing market crashed in 2008, one of the main reason was bank giving a lot of loans to people without checking their background. By not doing that, most people can’t repay the loans back, causing some companies to bankrupt like Bears and Stein. Based on my prior knowledge, banks bribe agencies to give their CDOs a good rating to deceive our society from the truth. When the economy is crashing, banks continue to deceive the common people in our world. Banks have too much power and need to be enforced. We need to have stricter enforcement on banks to prevent corruption again. One way to do is to limit the banks power. I agree with the author that some functions of banks should be removed. While banks are convenient for people, we, the people, need to prevent banks to be corrupted again. Another bank corruption could lead to our economy crashing again.
Bossone, Biagio, What Makes Banks Special? A Study of Banking, Finance, and Economic Development (November 30, 1999). World Bank Policy Research Working Paper No. 2408. Available at SSRN: https://ssrn.com/abstract=630780
