Question

What are the major flaws in the American banking/financial system? In what ways can we fix them?

Answer 1

The major flaws in the American banking/financial system are -

1 ) The challenge of low interest rates - Notwithstanding the objectives of monetary policy to support economic growth, the persistence of historically low interest rates since 2008 has negatively affected bank profitability.Net interest margins have fallen for both large and small banks. For large banks, margins are 40 basis points lower than the recession trough. For smaller banks, net interest margins remain near 30-year lows with a larger impact on earnings because smaller banks traditionally tend to be commercial lenders and depend almost exclusively on interest incomes as a source of revenue. In addition, these smaller banks face increased interest rate risk from this revenue source as they extend durations on their assets to improve yield.

2 ) The challenge of technological change - A second challenge facing the banking industry is a rapidly changing landscape for lending and payments mechanisms. Often referred to as disruptive technology, this change moves in the direction of improving productivity and efficiency across all sectors of the economy even as it alters existing business models. In the banking industry, technological change is challenging existing bank business models for lending and for how individuals and businesses make payments.

3 ) Regulatory compliance challenges- The regulatory compliance challenges that banks face today are, of course, a reflection of the evolving nature of the industry. In the United States, changes over the past three decades produced a highly concentrated banking system with a small number of systemically important banks and thousands of smaller institutions. The stress of the financial crisis revealed the associated systemic risk to the broader economy and its taxpayers.The international and U.S. response to the financial crisis was a host of new rules and regulations for capital, liquidity and resolution planning, to name a few. Now, with the associated increases in regulatory costs and lower profits, there are calls for halting or rolling back regulations. Thousands of small banks argue that regulatory burden threatens their long-term viability and ongoing business model as traditional lenders providing access to credit in small and rural communities.

We can fix these challanges through -

1 ) Fixing finance - The financial system is an essential part of any market economy. But it is based on a complex and fragile network of trust. The lesson of the crisis is that such networks are prone to abuse and then to collapse.

2 ) Changing corporate governance The core institution of contemporary capitalism is the limited liability corporation. It is a brilliant social invention. But it has inherent failings, the most important of which are that companies are not effectively owned.

3 ) Curbs to purchasing politics-Among the biggest concerns must be the relationship between wealth and democratic politics. Politics and markets each have their proper spheres. The market is based on the roles of people as producers and consumers. Politics is based on their roles as citizens. In the absence of protection for politics, the outcome is plutocracy.

4 ) Globalissing public good-Last but not least, today’s capitalism is global. This creates a host of both challenges and constraints.