Gotta ask whether the banking system makes sense in its current form.
- Part of it is actually a utility. Payments, sending money from one place to another, making sure there's an account at the other end of that number. Everyone needs this, yet being a huge international network there isn't a whole lot that one bank offers that another cannot.
- Part of it is deciding who to lend money to. Makes sense for the bank to decide this with its own money.
- Part of it is regulatory. We don't want money laundering. Have to ask whether this really ought to be up to law enforcement to do, or as it is now a massive burden on the banks, which also have bad incentives.
What if we had the central bank give everyone an account that was interoperable with the rest of the banking system? Then if you want to hand out money, you just do it. If you want to borrow money, find a lender.
You outline the problem very well. The banking sector has an ENORMOUS amount of power over the economy/society in a way that no other industry does because it literally has the ability to create money out of thin air (by loaning it into existence). The banking industry is the arbiter and credit in our society and decides where money get allocated.
This would be fine if it were their own money, but it's not - it's our bank accounts (ie. fractional reserve banking). Unfortunately individuals can't opt out of this because unlike private banks, individuals aren't allowed to open a bank account directly with the government (though these replies show that this is possible in countries like France).
The finance industry does not generate real wealth, it is a wealth extracting industry that profits off the spread between the interest rate decided by the central bank and the interest rates and fees it charges consumers. Banks do not create goods or services, they just decide who gets the money to do so, with money that's not theirs. 80% of bank credit goes to mortgage loans (driving up housing prices and saddling homeowners in debt). Banks have gone from 2% of the U.S. economy in the 1950s to 8% by 2008, and 1.5% of the British economy in 1978 to 15% by 2008.
The first step to fixing this is to give citizens the ability to opt out of private banks and bank directly with the central bank. Private banks should not be the only ones with this privilege.
Finance is a very important industry that adds a lot of value. If you get a student loan, you can go to university tomorrow and earn more in a few years, that's much more valuable than spending 20yrs at McDonald's earning nothing and saving very slowly to pay for your degree upfront as you would have to otherwise. Ditto mortgages. Ditto getting a car or starting a business or basically anything finance permits.
The great recession after 2008 and the great depression both show what happens when finance stops working. The rest of the economy collapses without it. You can all the way back to medieval Kings to see how important it is.
I don't know where people get this idea finance is not "real". If it wasn't useful, people wouldn't be paying for the services it provides, they're all optional.
This and the parent comment seem like pretty strong arguments. If the main differentiator is supposed to be whom banks decide to lend to, this doesn't seem to be working. They are extremely risk-averse about innovating lending or using criteria beyond credit score (to preempt accusations of discrimination, I was told, which is ironic since credit score is a hugely discriminatory system).
Anyway, I think I like the idea of a government-centralized deposit and monetary transfer system. This is the direct electronic equivalent of cash. A single national interest rate seems reasonable since current saving account rates are essentially set by the reserve rate today anyway. But I feel there must be a better privatized lending system than the current one though.
> The banking industry is the arbiter and credit in our society and decides where money get allocated.
Thanks for your comment. In my experience this is the most misunderstood aspect about money. Your comment explained it really well. I wish this was more widely understood and talked about.
I do not think the original commenter understands the monopolistic as well as parasitical nature of today's money, as they write:
> - Part of it is deciding who to lend money to. Makes sense for the bank to decide this with its own money.
...which is wrong. Banks do not have their 'own money'. They create money out of nothing. They get a license to create debt out of nothing (fiat). Many times today they do not even have to have the fractional reserves for any of it.
If anyone has any doubts please check out Anthropologist David Graeber's book 'Debt: The First 5,000 Years' as well as his explanation of the money system in this article:
"In other words, everything we know is not just wrong – it's backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity.
What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there's no question of public spending "crowding out" private investment. It's exactly the opposite."[1]
There are tons of different banks and credit unions as perfectly good options. There is a healthy and competitive market. The current system is a great way to create jobs and keep product offerings competitive, which means efficiency for the consumer. Banking is an extremely important industry to society, so it makes sense that they would have a lot of power, and a lot of oversight.
There have been suggestions over the years for the post office to offer banking services. They have branches literally everywhere, they're independent yet still a government agency, and have no profit motive.
The post office in France already offer banking. It's mandated by law as a public service and they can't reject customers. It doesn't offer the more complex products or investments though, it ain't their purpose.
Not sure about the UK post office. Seem to offer a lot of banking services and cards, but it says it doesn't do current accounts anymore.
There's a postal service bank in Israel as well. Lots of people use it, it's a fine service. They also offer fantastic foreign exchange rates, pretty much the best I think.
The USPS used to run limited banking services[1] in the 20th century. It was largely obsolete by the 1960s (according to the Wiki article).
It's also important to note that the USPS is required to be self-sufficient in its purse strings, but is heavily restricted in what markets it can/can't be in by Congress. I think the "privatize everything" crowd of legislators/lobbyists see the USPS in banking as an existential threat to private banks profit margins and it won't happen without a political black swan (maybe not even in the current black swan environment).
In Ukraine we used mail mans to deliver pensions, that was horrible for them. Almost every year they were assaults in which they died. They represent a simple target as they don't have means to protect themselves.
This was one of Andrew Yang's policy proposals in his presidential bid (and it was one of my favorites). Looks like a bunch of other countries already do it as well.
Policy should have sent the money directly to companies from the SBA/IRS, customers then would choose the banks to service that guaranteed government grant/loan essentially. Much like the FAFSA system for student loans, you get your amount, then a servicer handles the actual loan but there is literally no risk to them as it is guaranteed.
Why we sent guaranteed money to be held up in banks and did information and credit checks, on already known information from the IRS, well we know why, to pilfer it.
Had they ran it a better way, using the actual market, directly to businesses/individuals, that is lots of money out there for banks to go get and the market knows it is out there as well. Markets like knowing hundreds of billions and trillions are out there to go get. Make them earn the fees if they must.
Instead, it was a direct transfer from the Fed and treasury to QE that was pilfered by the usual suspects: hedge funds, market makers, foreign funds, oligarchs, wealth/value extraction ops, naked short selling, short and distort and more. The SBA money was pilfered by banks and large companies. The 'stimulus' for the economy, routed around the entire actual economy, never reaching individuals or true small business.
"The 'stimulus' for the economy, routed around the entire actual economy, never reaching individuals or true small business."
How can this be true if innumerable number of individuals received $1200 checks and many small businesses also received varying amounts in the four and five digits?
While they make sense for consumers, our banking system is tightly coupled with another: mortgages. The money that you deposit is loaned out. Could the federal government do the too? Sure, and the government (talking about the US here) does end up owning a large chunk of mortgages via Fannie Mae and Freddie Mac.
But the expertise and the manpower around vetting the mortgages is a _lot_ of work. Work that the federal government couldn’t decide to take on tomorrow, might not even want to, and if they announced that they were going to try would shake the core of the stock markets. (And yes, stock markets matter for more than just making rich people richer.)
On the other hand you suggest de-coupling: “Find a lender.” If you take away the deposits, who has that much money to lend out without being dangerously leveraged?
If you were to design an economic system, this might be the one you’d design. Given the one we have, narrow banks are difficult to allow without some significant “turbulence”.
It is rare today that banks hold mortgages and use depositor funds to fund them. Most (government backed, such as FHA, Fannie, and Freddie) mortgages are securitized and sold on the secondary market to bondholders (there are caveats for small banks, credit unions, and non-qm lenders).
A narrow bank does not require lending to service deposit accounts. It doesn't even need to pay interest to account holders. It simply needs to accept, store, and distribute fiat on the behalf of its customers via ACH, debit, and credit processing networks. Think prepaid card with no fees and no overdraft capability.
The Federal Reserve is culpable in that it will not approve banking licenses for narrow banks [1], as it challenges the business model of existing entrenched banking organizations. Can you build a narrow bank without getting the Fed to sign off? That is a conversation I would be interested in having over a cup of coffee.
> "If you take away the deposits, who has that much money to lend out without being dangerously leveraged?"
mortgages don't have to go through retail banks, and there are plenty of other transaction fees to support banks of all sorts.
in fact, there's no reason we should have allowed the consolidation of banking other than to allow rent-seekers to amalgamate more sources of relatively risk-free cash flows under the control of fewer and greedier hands. we could have maintained lots of small banks that serve the community and region, enriching those communities, rather than a few behemoths that strip-mine them.
a lot of the "work" of mortgages is really mindless paper-shuffling by other rent-seekers taking their little slice of the large transaction price. none of those service providers go away if the government decided to take over (not that i'm advocating such a takeover).
Consider that the Information Age has made actual financial work vastly less expensive (computers, spreadsheets, digital communication, etc.) while at the same time the finance sector has grown to be a much higher portion of the economy (in GDP). There could be a plausible explanation, but it certainly seems fishy.
Do you know how many more financial abstractions exist today than 40 years ago? That being said, I fully support moving 90+% of financial activity to smart contracts.
> What if we had the central bank give everyone an account that was interoperable with the rest of the banking system?
Many economists and others have been calling for this [1], and seeing the replies it looks like many countries already implement this.
If this existed, then we wouldn't need to funnel 3% of these emergency loans into the private banking industry, a pretty outrageous loss of money for what amounts to some modest paperwork.
Instead of all the fuckery, imagine if the government just sent everyone a monthly cheque with the only criteria that they are a living breathing adult with a US address.
When you believe that all humans will act in an honest and moral way, this is certainly the solution that appears to work best. Full disclosure: I'm with you, I think this is probably what will need to be seriously considered in the future.
Counter argument: Won't this just encourage fuckery from the citizenry? Won't they just be encouraged to game the system (have more kids, take care of people to intercept their checks, etc)?
I'm pretty sure banks are offering lots of value. What would you do without an electronic bank account? Send cash via mail? The problem is that they are abusing their monopoly position and lack accountability which results in a moral hazard. You didn't mention any of that.
> What if we had the central bank give everyone an account
Single point of failure. Single point of power seizure. Single point of abuse for policy/NSA/FBI/DEA/BATF/CIA.
As an alternative: Each bank must speak a common language for transactions as part of their charter, aka "ACH". The task to accomplish what you wish simply becomes "Improve ACH to realtime, rather than batch" and a bunch of our problems go away. Furthermore, give banks more freedom as to how they want to interchange money so competition is created to force fees and middlemen down. The nice thing about this approach is there's a fast default path via ACH, but banks are free to innovate elsewhere, improving services.
I want to transfer big sum of money, essentially my life savings to someone.
Who do I choose for the job:
- local post office
- some crypto mumbo-jumbo that a lot of criminals use
- huge institution with daily income five orders of magnitude more than the sum I am talking about, regulated up to a dollar with 100 years of history of earning international trust
The local post office, backed by the USG, with hundreds of thousands of employees and deals in billions of dollars per year? That tiny little enterprise? Is that what you're talking about like it's diminutive?
Money laundering is still pretty easy to do. If you go through the proper channels and know the reporting laws, it's easy to avoid altogether. Although time consuming and you deal with swaths of physical cash, it's not impractical. You could honestly pay high school students like $20 to convert $1000 cash to a money order or something addressed to your company. They "pay" the company for it's "services" and you wash it through loans and other stuff.
Now the trick is to manage it in a way that a prosecutor couldn't convince a jury of structuring. Have an accountant fabricate records and mix it with legitimate purchases and expenses. It's essentially a front...but what corporation isnt one?
> Part of it is regulatory. We don't want money laundering. Have to ask whether this really ought to be up to law enforcement to do, or as it is now a massive burden on the banks, which also have bad incentives.
> What if we had the central bank give everyone an account that was interoperable with the rest of the banking system? Then if you want to hand out money, you just do it. If you want to borrow money, find a lender.
Except nobody knows if PPP money is a loan or a handout yet. The criteria for determining that is in the future, and central banks are as equally incapable of time travel as anyone else. That's why they're administered as forgivable loans. All PPP money is a loan right now.
Can you explain this? It's never made any sense, at all.
1. If you earn excess unreported income, eventually the IRS will figure it out and come get their cut.
2. If you earn it through criminal means, you're already committing a crime for which, if caught, you will be punished.
Why is the act of obfuscating the source of income a crime? Who gets harmed by this, that isn't already harmed by either the potential crime committed or taxes evaded?
If you make money laundering easy it becomes much easier to commit crimes and keep your gains, while the volume of the payoff gets much higher.
If drug dealers in the 80s could have started hedge funds (or even deposit funds legally) with their shoeboxes of cash, it would’ve been an even crazier ball game.
It's not a crime if the source is legitimate, but if you ask me to hold on to a bag of cash which your friend will retrieve tomorrow, then it's reasonable for me to ask if the cash is legit. Otherwise, I may be harmed by being part of a crime.
It's no different for a financial institution holding onto a bag of cash.
regarding 1), the point of money laundering is that you can report that income to the IRS without clearly implicating yourself in criminal activity. laundering your money and then not reporting it defeats the purpose.
there's nothing inherently wrong with obfuscating a source of income, although it's hard to do this without committing some sort of fraud along the way. it's a (somewhat distasteful, imo) administrative convenience. people who run criminal enterprises have a variety of methods for distancing themselves from the actual crimes they are making money from. it turns out to be a lot easier to catch them doing funny stuff with money than it is to pin any of the original crimes on them.
> What if we had the central bank give everyone an account that was interoperable with the rest of the banking system?
Because we don't trust the central bank enough (edit: to not arbitrarily give their friends money directly - still happens though). And they don't want to be politicized by giving up autonomy. So the current compromise is that by law they can't lend directly except by Congressional statute, such as the CARES Act stipulates.
What does this actually mean? "Trust" isn't a one-dimensional version. What don't you trust them to do or not do? Do people really "trust" Wells Fargo, opener of fraudulent accounts, more than the Federal Reserve? Why?
I don't think it's a good idea, the government sector is usually less efficient than private sector. It would only make sense if the banking market was not competitive but it's not the case.
> The organisation chalked up notable firsts. It was the first bank designed with computerised operations in mind; the first bank in Europe to adopt OCR (optical character recognition) technology; the first bank to offer interest-bearing current accounts, and the first bank in Europe to offer telephone banking, operating several years prior to the start of Midland Bank's First Direct service. It is widely credited for shaking up the UK banking market, forcing competitors to innovate and respond to the needs of the mass market.
It was literally by the socialist government to give cheap and effective banking to the unbanked working class in the 1960s.
Another issue for the US: the EU has an explicit remit for a single market. The US does not, and in some areas it's much less harmonised. Banking is one of them. The US would benefit from a central organisation coordinating things like Faster Payments. Everybody should have the opportunity to do fast, secure, free interbank payments.
The thing here is the bank isn’t taking any risk here. All the loans are guaranteed by the government. So banks are really just a middle man that is transferring money from the SBA to a small business’s bank account and taking on zero credit risk.
The government has the ability to send funds directly to people obviously...that’s how they are sending the stimulus checks and send tax refunds.
Banks are basically being compensated for doing paperwork.
Not only they are not taking risk, they get to pick who gets the funding so they further optimize their bottom line, by say favoring bigger loans or loans to their most indebted customers. I hope there is a reckoning but I am pretty sure there will be bonuses to the CEO's instead.
My understanding is there is actually some risk. If they do the paperwork wrong, or if the regulations change randomly (which they have a bunch of times already), the bank could theoretically be on the hook. Some of this reportedly happened in the last recession/bailout, so the banks are a bit gun shy.
I am not a banker, so this is all second hand information I have read on r/smallbusiness and other forums while trying to figure out my own stuff.
Don't get me wrong, I think they are getting paid a ton, probably too much, but it is not zero risk.
The banks considered that risk and said they wouldn't participate unless it was eliminated.[0] I can't find any follow-up article covering if or how that resolved but I notice most banks seem to have participated in the end.
Sure there’s probably some compliance risk here but that’s why most businesses are only working with existing clients. Very few are approving applications from brand new customers they’ve never had a relationship with.
>>Banks are basically being compensated for doing paperwork.
They're really being compensated for having the network to do what the government wanted to. No one else has the capacity to give money to small (and some large) businesses in a record amount of time.
I'd pay 5% to get the stimulus cash a few days after the bill is passed...and I guess the same for the government /taxpayers. Corona loans that go out in October are no good, so you pay a fee for performance. Call that $10B a Bank Stimulus Act
To be fair that’s a risk created by the financial institutions in the way they chose to implement & process the loans, not a risk inherent in the structure of the Paycheck Protection Program. A bank that processed these loan applications fairly and in the order they were received doesn’t really need to worry. (Whether such a bank exists at all is a different story.)
But even the banks who blatantly processed the applications in an unfair or discriminatory manner probably aren’t losing much sleep. The clients with the resources & connections to make a stink are the clients who got approved. Funny how that works.
Banks do that for many programs. For many different services, banks function as a less efficient and more expensive bureaucracy than the government itself.
Plus there is a non-trivial amount of pressure to keep government out of things that the private sector could do, both politically speaking and from the private sectors that stand to profit.
This was done for a logistical reason so companies could get money in days/weeks not months. Stimulus checks just go blindly out. Tax refunds have a system that has been in place for years. Making random payments to random people/companies has no parallel. The government doesn't have staff to look at payroll receipts, etc. to determine how much a company should get. Banks do this all the time and have the systems to handle it. Also, people already have LOCs and other relationships with their banks. Banks weren't lending because the loans would be risky so the government said will cover any losses up to X and people started getting money that week.
In the future, we'll have better systems for this kind of thing but we don't have them today. The bank plan was the most expedient one.
> The government has the ability to send funds directly to people obviously...that’s how they are sending the stimulus checks and send tax refunds.
Actually a major issue with the stimulus is that the government does not have this ability, which is why it will takes months for some people to get their checks. Many people don't have to file income taxes, so the government doesn't have their info.
yes they do, they do it every year via tax returns.
the problems relate to unemployement systems (completely different system) or our administration holding things up (trump demanding his name be on the checks)
The bank is taking all of the AML / KYC risk for all of these loans by law, which is costlier / riskier than you’d expect. Further, they’re taking a giant risk that they did paperwork in line with a massive government program that was rolled out extremely quickly without guidance or details.
$10B seems like a pretty low number for this risk plus the cost of servicing the loans over time.
I believe it is not taking any credit risk but it is still taking a fraud risk and I assume still needs to meet its KYC obligations. Plus the documentation and operational needs.
Anyone who works in the financial industry knows that client onboarding is painful.
Average money a bank made per loan was 10,000,000,000/1,600,000 (assuming all banks made an equal distribution of loans)
Or $6250 per loan. Given that all loans ran out about 1 week after the program was started.
I imagine the person effort per loan was pretty variable, but that's some pretty crazy capture by the banks.
(Banking sector employs almost 1.5M people), So even if every employee working at all banks, was allocated to work on one loan each for a week. (HINT THIS DIDN'T HAPPEN) the annualized salary for each of these people would have to be 6250*52, or 325K, which it's not).
I guess my question, is how was the decision made to offer banks such a big kicker for administrating loans with nonzero, but practically 0 risk?
(of note, theoretically banks are going to need to do some serving of the loan over it's lifetime, and deal with this loan forgiveness program, etc.. so if that's the case and it's more like 2-3 weeks of person work per loan, you still get some pretty big numbers, but they feel a bit more sane)
FWIW, the banks didn’t feel like it was 0 risk, many of them were doing a lot of due diligence, document checking, etc. because they were worried about it.
I’ve seen stories of small business owners talking about how difficult it was to get the loan through due to having to go back and forth with documents etc. although I’m sure it varied per bank.
2.8% doesn’t seem like that much for me, especially considering the goal was to get the money out the door as fast as possible due to the emergency, and setting up and hiring a government bureaucracy to administer and give the loans would have cost far more in time than the solution of giving it through the banks.
Why did it need to be a bank to begin with? Are banks involved when the government hands out low interest loans for natural disasters. Do they take cuts from that money? If so, I've never heard of it before. What about the 9/11 fund? Did banks get a cut of that money as well? Why is this situation different?
I don't think the PPP loan program was "0 risk" and I don't think banks perceived it that way. If they could easily make 2.8% for 0 actual/perceived risk, there would be no reason for any bank to deny any potentially qualified applicant.
From what I read a number of national banks (eg. BofA, Chase, etc) only offered to loan to customers with previous/existing loans (banks reducing risk). I think they were wary of underwriting risk (even though the USA government made assurances to banks) and risk of perception / reputation risk if any companies they applied on behalf of turned out to defraud the PPP program (possible future reputation damage).
There's no definition of 0 risk that involves lending out 350 billion dollars of your own funds and hoping you don't make a single mistake of any kind that causes you to not get your money back. And that's even before you address the opportunity cost of lending out funds at 1% interest.
Not a popular opinion but considering the effort involved, should they not have earned fees? Should they have donated their time and resources? I'm sure it took a monumental effort to pull it together with the lack of clarity being handed down and the volume of loans to process in a short period of time. If the government wanted to do for $0 fees they would have figured out how to do it themselves. If a private business has to do it then they should be paid. If we are complaining about this what about 3M and everyone else making tons of money off of PPE? Obviously it isn't very palatable to hear about others making money off of this kind of thing but we need incentives for people to step up and help.
> That makes it sounds like bank is taking on some form of risk, but they're not.
They did take on some risk -- they need to ensure the loans they make conform to the law passed mere days ago in order to get the government guarantee. Beyond the massive overtime put in by bank lawyers to understand the rapidly passed law, there are apparently ambiguities and contradictions in the law that are not resolved, and losing the guarantee is a huge risk considering how many businesses on the brink are applying for free money. It's not clear where the line between risk premium and profit is, but it's not zero.
The problem is they did a terrible job at it AND took a huge profit for themselves. From what I’ve heard many large banks started denying applicants very shortly after accepting applications - this after forcing many companies to submit paperwork multiple times over errors the bank made itself.
I put in an application immediately with Bank of America. My business is pretty small so our requested loan was about ~$80K. I personally know others who used the same automated system after me and received a loan while I got an email a couple days ago asking me to hope that Congress allocates more money.
The problems are pretty simple. Big banks prioritized big customers, especially those with debt to the banks. If your monthly payroll is $2.5M, are you really a mom and pop shop? Big banks then collected ridiculously high fees for a simpler process than they normally conduct. I'm guessing they literally had a team that estimated the highest fee they could charge without being punished by the government.
could they have done it at cost? Yes. Did they need to make a profit off this? Probably not. Are they relatively unaffected (due to prevalance of online banking and also reduced costs due to physical banks being closed)? Yes.
The banking industry is highly affected by the economic conditions that currently obtain. Default rates for all kinds of loans are skyrocketing, and this may just be the beginning of an extended period of turmoil that will rock the balance sheets of banks around the world.
I don’t think they deserve undue sympathy, but they are far from unaffected.
Banks don't make money from "online banking". They make their money from issuing loans. A ton of those loans are going to go into default so banking is going to be hit just as hard as other businesses, it's just going to happen in 3 months instead of today.
Currently there are hospitals who are going bankrupt because of they've been forced to stop doing work which pays the bill and instead turn into emergency care providers at war scale.
Retailers have been forced to invested in 2 meter rule things and, perspex everywhere.
Why can't the Banks of all institutions be expected to, you know, give something back? You'd almost think that money is their core business so they always know how to come out ahead.
Just considering the 2008 bank bailouts, yes they should donate their time and resources. I wish terms like these were clarified prior to releasing the stimulus $.
One of my friends is the VP of a community bank with probably somewhere around 60 locations locally. It's completely local; the businesses they work with are the barbershops, car washes, and bakeries we have in our communities. He said it's never been this crazy at the bank, working 18-hour days to make sure everything is processed timely. People automatically think of Wells Fargo, Bank of America, and Chase, but folks need to remember the amount of resources it takes to roll this program out, and that not every participating bank is a behemoth Wall Street too-big-to-fail bank.
Six months ago any company making astronomical profits, charging for their services and marking up products was fine and everyone accepted it.
Now suddenly everyone is questioning if a bank should charge such huge fees, if I should be allowed to markup N-95 masks, etc.
When Nike make a pair of shoes for $4 and sell it for $400 nobody seems to care. By now it's illegal and banned in many places to mark up toilet paper and hand sanitizer.
Not only should we be asking if banks should be making $10B in fees during this time, we should be asking if every company should be doing what they were doing just a few months ago.
That's about a 2% fee which doesn't seem out of line with other transaction processing fees that are out there. That fee probably has built in insurance for fraud and other failures. And also the cost of the transaction. I bet that fee is the same fee as a year ago?
We are back stopping the banks from failing by buying their distressed assets, changing the fdic holding requirements, helping out with overnight lending rates etc. They shouldn't be charging any fee.
Yes but these fees are huge with larger loans. Why are the fees percent based rather then flat rate? The banks giving out these loans are not taking on any risk with the loan. So how are they getting away with large fees associated with the loans?
This is the wrong way to think about it. Rates are nearly negative, so 2% is practically 10, 100X the rates banks can earn otherwise. It's basically free money shoveled into banks, a massive boon.
Why is a 2% fee acceptable on money being given to the public during a crisis? Why can't the government just give the money directly to businesses without some middleman extracting a 2% fee?
Boggles my mind that anyone jumps to defend the banks in this scenario for what effectively amounts to a racket.
Lawsuits claim banks prioritized loans to large businesses. JPMorgan disputes those allegations, claiming it processed loans fairly. By fairly it means it put all the small business loans in one large FIFO queue, and all the large business loans in a separate much shorter FIFO queue. Effectively prioritizing large business loans.
This article and the Bloomberg article[1] that is currently on the front page.
From this NPR article:
> We funded more than twice as many loans for smaller businesses than the rest of the firm's clients combined," the bank said in a statement to clients. "Each business worked separately on loans for its customers. Business Banking, Chase's bank for our smaller business customers, processed loan applications generally sequentially"
Note "Each business worked separately on loans" and "processed loan applications generally sequentially". They divide their consumers up into large business and small business groups, assigning dedicated staff to each group. There are far more small businesses, making the queue for small businesses much deeper. Even though there were more workers (staff) pulling from the small business queue, there weren't enough to make up for the discrepancy in queue depth.
From the Bloomberg article:
> More than 300,000 customers of JPMorgan’s business banking unit, which serves smaller firms, applied for loans through the Paycheck Protection Program
> By comparison, about 5,500 larger, and sometimes more sophisticated, customers of the commercial banking business applied for funding.
> The data reveal that, in the race to get a loan in the first-come, first-served program, larger businesses had a leg up over smaller ones -- even when applying through the same bank.
> its commercial bank, with fewer clients, was able to process applications faster, said a person familiar with the matter.
We did our PPP loan for our agency through a small regional bank that bent over backwards to help local businesses understand the legislation and apply on time. The bank paid a bunch of salaries to be able to do this. It’s completely reasonable that they earned a small, disclosed-in-advance fee from our loan to pay for those operations.
Banks took almost 3% of the total bailout funds for loans that have almost zero risk (government backed and almost exclusively made to existing customers).
On a $350k loan, the fee was 5%, or $17.5k.
On a larger loan, the fee as a % goes down, but the total value goes up. These larger loans, to my knowledge, carry no more risk, nor any more work by the bank.
Yes, the banks should earn a minimal (and probably fixed) filing fee. No, they should not receive 3% of the amount set aside for small-business assistance.
I agree those numbers are accurate. If I understand correctly, you intend for $17.5k to be a shockingly high number, but smaller banks already receive percentage origination fees on large loans that cover fixed operation costs and are not overly profitable.
Readit News
- Part of it is actually a utility. Payments, sending money from one place to another, making sure there's an account at the other end of that number. Everyone needs this, yet being a huge international network there isn't a whole lot that one bank offers that another cannot.
- Part of it is deciding who to lend money to. Makes sense for the bank to decide this with its own money.
- Part of it is regulatory. We don't want money laundering. Have to ask whether this really ought to be up to law enforcement to do, or as it is now a massive burden on the banks, which also have bad incentives.
What if we had the central bank give everyone an account that was interoperable with the rest of the banking system? Then if you want to hand out money, you just do it. If you want to borrow money, find a lender.
This would be fine if it were their own money, but it's not - it's our bank accounts (ie. fractional reserve banking). Unfortunately individuals can't opt out of this because unlike private banks, individuals aren't allowed to open a bank account directly with the government (though these replies show that this is possible in countries like France).
The finance industry does not generate real wealth, it is a wealth extracting industry that profits off the spread between the interest rate decided by the central bank and the interest rates and fees it charges consumers. Banks do not create goods or services, they just decide who gets the money to do so, with money that's not theirs. 80% of bank credit goes to mortgage loans (driving up housing prices and saddling homeowners in debt). Banks have gone from 2% of the U.S. economy in the 1950s to 8% by 2008, and 1.5% of the British economy in 1978 to 15% by 2008.
The first step to fixing this is to give citizens the ability to opt out of private banks and bank directly with the central bank. Private banks should not be the only ones with this privilege.
The great recession after 2008 and the great depression both show what happens when finance stops working. The rest of the economy collapses without it. You can all the way back to medieval Kings to see how important it is.
I don't know where people get this idea finance is not "real". If it wasn't useful, people wouldn't be paying for the services it provides, they're all optional.
Anyway, I think I like the idea of a government-centralized deposit and monetary transfer system. This is the direct electronic equivalent of cash. A single national interest rate seems reasonable since current saving account rates are essentially set by the reserve rate today anyway. But I feel there must be a better privatized lending system than the current one though.
Thanks for your comment. In my experience this is the most misunderstood aspect about money. Your comment explained it really well. I wish this was more widely understood and talked about.
I do not think the original commenter understands the monopolistic as well as parasitical nature of today's money, as they write:
> - Part of it is deciding who to lend money to. Makes sense for the bank to decide this with its own money.
...which is wrong. Banks do not have their 'own money'. They create money out of nothing. They get a license to create debt out of nothing (fiat). Many times today they do not even have to have the fractional reserves for any of it.
If anyone has any doubts please check out Anthropologist David Graeber's book 'Debt: The First 5,000 Years' as well as his explanation of the money system in this article:
"In other words, everything we know is not just wrong – it's backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity.
What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there's no question of public spending "crowding out" private investment. It's exactly the opposite."[1]
[1] https://www.theguardian.com/commentisfree/2014/mar/18/truth-...
The post office in France already offer banking. It's mandated by law as a public service and they can't reject customers. It doesn't offer the more complex products or investments though, it ain't their purpose.
Not sure about the UK post office. Seem to offer a lot of banking services and cards, but it says it doesn't do current accounts anymore.
It's also important to note that the USPS is required to be self-sufficient in its purse strings, but is heavily restricted in what markets it can/can't be in by Congress. I think the "privatize everything" crowd of legislators/lobbyists see the USPS in banking as an existential threat to private banks profit margins and it won't happen without a political black swan (maybe not even in the current black swan environment).
[1] https://en.wikipedia.org/wiki/United_States_Postal_Savings_S...
https://www.anpost.com/Money
Why we sent guaranteed money to be held up in banks and did information and credit checks, on already known information from the IRS, well we know why, to pilfer it.
Had they ran it a better way, using the actual market, directly to businesses/individuals, that is lots of money out there for banks to go get and the market knows it is out there as well. Markets like knowing hundreds of billions and trillions are out there to go get. Make them earn the fees if they must.
Instead, it was a direct transfer from the Fed and treasury to QE that was pilfered by the usual suspects: hedge funds, market makers, foreign funds, oligarchs, wealth/value extraction ops, naked short selling, short and distort and more. The SBA money was pilfered by banks and large companies. The 'stimulus' for the economy, routed around the entire actual economy, never reaching individuals or true small business.
How can this be true if innumerable number of individuals received $1200 checks and many small businesses also received varying amounts in the four and five digits?
While they make sense for consumers, our banking system is tightly coupled with another: mortgages. The money that you deposit is loaned out. Could the federal government do the too? Sure, and the government (talking about the US here) does end up owning a large chunk of mortgages via Fannie Mae and Freddie Mac.
But the expertise and the manpower around vetting the mortgages is a _lot_ of work. Work that the federal government couldn’t decide to take on tomorrow, might not even want to, and if they announced that they were going to try would shake the core of the stock markets. (And yes, stock markets matter for more than just making rich people richer.)
On the other hand you suggest de-coupling: “Find a lender.” If you take away the deposits, who has that much money to lend out without being dangerously leveraged?
If you were to design an economic system, this might be the one you’d design. Given the one we have, narrow banks are difficult to allow without some significant “turbulence”.
A narrow bank does not require lending to service deposit accounts. It doesn't even need to pay interest to account holders. It simply needs to accept, store, and distribute fiat on the behalf of its customers via ACH, debit, and credit processing networks. Think prepaid card with no fees and no overdraft capability.
The Federal Reserve is culpable in that it will not approve banking licenses for narrow banks [1], as it challenges the business model of existing entrenched banking organizations. Can you build a narrow bank without getting the Fed to sign off? That is a conversation I would be interested in having over a cup of coffee.
[1] https://www.spglobal.com/marketintelligence/en/news-insights...
mortgages don't have to go through retail banks, and there are plenty of other transaction fees to support banks of all sorts.
in fact, there's no reason we should have allowed the consolidation of banking other than to allow rent-seekers to amalgamate more sources of relatively risk-free cash flows under the control of fewer and greedier hands. we could have maintained lots of small banks that serve the community and region, enriching those communities, rather than a few behemoths that strip-mine them.
a lot of the "work" of mortgages is really mindless paper-shuffling by other rent-seekers taking their little slice of the large transaction price. none of those service providers go away if the government decided to take over (not that i'm advocating such a takeover).
Not to be snarky, but the Great Recession didn't give me a lot of confidence in the expertise involved in vetting mortgages.
Many economists and others have been calling for this [1], and seeing the replies it looks like many countries already implement this.
If this existed, then we wouldn't need to funnel 3% of these emergency loans into the private banking industry, a pretty outrageous loss of money for what amounts to some modest paperwork.
[1] https://www.npr.org/sections/money/2018/07/11/628173553/fed-...
and which nowdays is probably done by a computer system without any paper being involved
Universal trickle up.
Counter argument: Won't this just encourage fuckery from the citizenry? Won't they just be encouraged to game the system (have more kids, take care of people to intercept their checks, etc)?
Dead Comment
Single point of failure. Single point of power seizure. Single point of abuse for policy/NSA/FBI/DEA/BATF/CIA.
As an alternative: Each bank must speak a common language for transactions as part of their charter, aka "ACH". The task to accomplish what you wish simply becomes "Improve ACH to realtime, rather than batch" and a bunch of our problems go away. Furthermore, give banks more freedom as to how they want to interchange money so competition is created to force fees and middlemen down. The nice thing about this approach is there's a fast default path via ACH, but banks are free to innovate elsewhere, improving services.
Private banks already get a bank account with the government (the Central Bank), why shouldn't individuals have that same option?
I want to transfer big sum of money, essentially my life savings to someone.
Who do I choose for the job:
- local post office
- some crypto mumbo-jumbo that a lot of criminals use
- huge institution with daily income five orders of magnitude more than the sum I am talking about, regulated up to a dollar with 100 years of history of earning international trust
- some other option
?
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Now the trick is to manage it in a way that a prosecutor couldn't convince a jury of structuring. Have an accountant fabricate records and mix it with legitimate purchases and expenses. It's essentially a front...but what corporation isnt one?
End drug prohibition.
Also, the Fed doesn't 'give out money' really.
If the Government wants to 'give out money' it can write a cheque - or - use some kind of IBN/SWIFT style coding to direct deposit.
The government needs: better identity management so you can 'login' an 'prove' who you are, where you live. And banks need better routing/transfer.
FYI there is 'paperwork' and 'process' involved in doling out money, it might have been better not to use the banks.
Except nobody knows if PPP money is a loan or a handout yet. The criteria for determining that is in the future, and central banks are as equally incapable of time travel as anyone else. That's why they're administered as forgivable loans. All PPP money is a loan right now.
Can you explain this? It's never made any sense, at all.
1. If you earn excess unreported income, eventually the IRS will figure it out and come get their cut.
2. If you earn it through criminal means, you're already committing a crime for which, if caught, you will be punished.
Why is the act of obfuscating the source of income a crime? Who gets harmed by this, that isn't already harmed by either the potential crime committed or taxes evaded?
If drug dealers in the 80s could have started hedge funds (or even deposit funds legally) with their shoeboxes of cash, it would’ve been an even crazier ball game.
a series of legislations right around the time of declaration of war against drugs (91st USA congress) pretty much made 'money laundering' a thing
prior to that, during the prohibition era it wasn't called money laundering yet it was simple tax evasion.
It's no different for a financial institution holding onto a bag of cash.
there's nothing inherently wrong with obfuscating a source of income, although it's hard to do this without committing some sort of fraud along the way. it's a (somewhat distasteful, imo) administrative convenience. people who run criminal enterprises have a variety of methods for distancing themselves from the actual crimes they are making money from. it turns out to be a lot easier to catch them doing funny stuff with money than it is to pin any of the original crimes on them.
Because we don't trust the central bank enough (edit: to not arbitrarily give their friends money directly - still happens though). And they don't want to be politicized by giving up autonomy. So the current compromise is that by law they can't lend directly except by Congressional statute, such as the CARES Act stipulates.
What does this actually mean? "Trust" isn't a one-dimensional version. What don't you trust them to do or not do? Do people really "trust" Wells Fargo, opener of fraudulent accounts, more than the Federal Reserve? Why?
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The central bank is not a regular bank, it’s a “reserve” bank. Very different function.
Today's banking, tomorrow is Telcos, the day after...
What if the problem is the lobbying?
Statements like this require proof.
What do you think a lender is? Why do you think they can lend money?
More seriously, compare the UK's former state-run consumer bank: https://en.wikipedia.org/wiki/Girobank
> The organisation chalked up notable firsts. It was the first bank designed with computerised operations in mind; the first bank in Europe to adopt OCR (optical character recognition) technology; the first bank to offer interest-bearing current accounts, and the first bank in Europe to offer telephone banking, operating several years prior to the start of Midland Bank's First Direct service. It is widely credited for shaking up the UK banking market, forcing competitors to innovate and respond to the needs of the mass market.
It was literally by the socialist government to give cheap and effective banking to the unbanked working class in the 1960s.
Another issue for the US: the EU has an explicit remit for a single market. The US does not, and in some areas it's much less harmonised. Banking is one of them. The US would benefit from a central organisation coordinating things like Faster Payments. Everybody should have the opportunity to do fast, secure, free interbank payments.
The government has the ability to send funds directly to people obviously...that’s how they are sending the stimulus checks and send tax refunds.
Banks are basically being compensated for doing paperwork.
sincerely,
"the civil liberties lobby"
I am not a banker, so this is all second hand information I have read on r/smallbusiness and other forums while trying to figure out my own stuff.
Don't get me wrong, I think they are getting paid a ton, probably too much, but it is not zero risk.
[0] https://www.reuters.com/article/us-health-coronavirus-stimul...
They're really being compensated for having the network to do what the government wanted to. No one else has the capacity to give money to small (and some large) businesses in a record amount of time.
I'd pay 5% to get the stimulus cash a few days after the bill is passed...and I guess the same for the government /taxpayers. Corona loans that go out in October are no good, so you pay a fee for performance. Call that $10B a Bank Stimulus Act
But even the banks who blatantly processed the applications in an unfair or discriminatory manner probably aren’t losing much sleep. The clients with the resources & connections to make a stink are the clients who got approved. Funny how that works.
In the future, we'll have better systems for this kind of thing but we don't have them today. The bank plan was the most expedient one.
Actually a major issue with the stimulus is that the government does not have this ability, which is why it will takes months for some people to get their checks. Many people don't have to file income taxes, so the government doesn't have their info.
the problems relate to unemployement systems (completely different system) or our administration holding things up (trump demanding his name be on the checks)
$10B seems like a pretty low number for this risk plus the cost of servicing the loans over time.
Anyone who works in the financial industry knows that client onboarding is painful.
Most banks are only working with existing customers, so the DD is 99% complete. Few are reviewing applications from brand new clients.
Quick read looks like 2.8% off the top, for 0 risk (10/349).
Total businesses receiving loans was 1.6M (https://www.pymnts.com/loans/2020/sba-lenders-approval-ppp-l...)
Average money a bank made per loan was 10,000,000,000/1,600,000 (assuming all banks made an equal distribution of loans)
Or $6250 per loan. Given that all loans ran out about 1 week after the program was started.
I imagine the person effort per loan was pretty variable, but that's some pretty crazy capture by the banks.
(Banking sector employs almost 1.5M people), So even if every employee working at all banks, was allocated to work on one loan each for a week. (HINT THIS DIDN'T HAPPEN) the annualized salary for each of these people would have to be 6250*52, or 325K, which it's not).
I guess my question, is how was the decision made to offer banks such a big kicker for administrating loans with nonzero, but practically 0 risk?
(of note, theoretically banks are going to need to do some serving of the loan over it's lifetime, and deal with this loan forgiveness program, etc.. so if that's the case and it's more like 2-3 weeks of person work per loan, you still get some pretty big numbers, but they feel a bit more sane)
I’ve seen stories of small business owners talking about how difficult it was to get the loan through due to having to go back and forth with documents etc. although I’m sure it varied per bank.
2.8% doesn’t seem like that much for me, especially considering the goal was to get the money out the door as fast as possible due to the emergency, and setting up and hiring a government bureaucracy to administer and give the loans would have cost far more in time than the solution of giving it through the banks.
From what I read a number of national banks (eg. BofA, Chase, etc) only offered to loan to customers with previous/existing loans (banks reducing risk). I think they were wary of underwriting risk (even though the USA government made assurances to banks) and risk of perception / reputation risk if any companies they applied on behalf of turned out to defraud the PPP program (possible future reputation damage).
That makes it sounds like bank is taking on some form of risk, but they're not.
Sure, bankers are paid more and there's labor involved.
But $10 billion is 1 year salary for 100,000 people making $100,000 / year.
It's obscene amount of money.
They did take on some risk -- they need to ensure the loans they make conform to the law passed mere days ago in order to get the government guarantee. Beyond the massive overtime put in by bank lawyers to understand the rapidly passed law, there are apparently ambiguities and contradictions in the law that are not resolved, and losing the guarantee is a huge risk considering how many businesses on the brink are applying for free money. It's not clear where the line between risk premium and profit is, but it's not zero.
The problems are pretty simple. Big banks prioritized big customers, especially those with debt to the banks. If your monthly payroll is $2.5M, are you really a mom and pop shop? Big banks then collected ridiculously high fees for a simpler process than they normally conduct. I'm guessing they literally had a team that estimated the highest fee they could charge without being punished by the government.
I don’t think they deserve undue sympathy, but they are far from unaffected.
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Look at any global bank's stock price throughout this crisis. Being a lender to the businesses of a shut down economy is not very profitable.
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With "people" you mean private businesses in this context I suppose?
If so you could call these incentives "regulations".
Retailers have been forced to invested in 2 meter rule things and, perspex everywhere.
Why can't the Banks of all institutions be expected to, you know, give something back? You'd almost think that money is their core business so they always know how to come out ahead.
Why would you assume that?
You sound like the PR department of a bank.
Alternately, what do you think the pay per man-hour ended up being?
Dead Comment
Now suddenly everyone is questioning if a bank should charge such huge fees, if I should be allowed to markup N-95 masks, etc.
When Nike make a pair of shoes for $4 and sell it for $400 nobody seems to care. By now it's illegal and banned in many places to mark up toilet paper and hand sanitizer.
Not only should we be asking if banks should be making $10B in fees during this time, we should be asking if every company should be doing what they were doing just a few months ago.
An uncharitable reading might assume a spurious correlation.
With these kinds of insane numbers ($350B!) even tiny percentages are huge.
Boggles my mind that anyone jumps to defend the banks in this scenario for what effectively amounts to a racket.
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From this NPR article:
> We funded more than twice as many loans for smaller businesses than the rest of the firm's clients combined," the bank said in a statement to clients. "Each business worked separately on loans for its customers. Business Banking, Chase's bank for our smaller business customers, processed loan applications generally sequentially"
Note "Each business worked separately on loans" and "processed loan applications generally sequentially". They divide their consumers up into large business and small business groups, assigning dedicated staff to each group. There are far more small businesses, making the queue for small businesses much deeper. Even though there were more workers (staff) pulling from the small business queue, there weren't enough to make up for the discrepancy in queue depth.
From the Bloomberg article:
> More than 300,000 customers of JPMorgan’s business banking unit, which serves smaller firms, applied for loans through the Paycheck Protection Program
> By comparison, about 5,500 larger, and sometimes more sophisticated, customers of the commercial banking business applied for funding.
> The data reveal that, in the race to get a loan in the first-come, first-served program, larger businesses had a leg up over smaller ones -- even when applying through the same bank.
> its commercial bank, with fewer clients, was able to process applications faster, said a person familiar with the matter.
[1] https://outline.com/HacVTV
On a $350k loan, the fee was 5%, or $17.5k. On a larger loan, the fee as a % goes down, but the total value goes up. These larger loans, to my knowledge, carry no more risk, nor any more work by the bank.
Yes, the banks should earn a minimal (and probably fixed) filing fee. No, they should not receive 3% of the amount set aside for small-business assistance.
This program made them 1/3 of 1 month's normal revenue
They've lost far more even with the fees they collected from this program.
As someone said above - doctors are not working for free, why should bank employees?