The Good Banker

Abstract

What is the economic value added of banks? The economics literature on financial intermediation focuses on the role of banks as deposit-taking institutions and as delegated monitors of borrowers. But this description barely begins to represent what banks do in a modern economy. Besides commercial lending, large banks are engaged in a number of other activities ranging from cash management, trade credit, swaps and derivatives trading, to underwriting of securities. In recent decades, banks have relied increasingly on fee income generated from their activities other than lending. The financial crisis, and the concerns about "too-big-to-fail" banks it has exposed, has led to a re-evaluation of the economic benefits of banks' non-lending activities. Do these provide economic benefits, or are they simply an undesirable side-product of deregulation? This article focuses on this question and examines how the new financial regulations introduced after the crisis deal with this central question.