Banks Misunderstood
Banks Misunderstood
This chapter is concerned with the question how banking could generate (unsustainable) returns of 15–25 per cent on equity before the crisis? Our answer is that in wholesale banking, small return per asset were beefed up through leverage while bonuses and profits were multiplied through the construction of ever more fragile latticeworks that were the result of bricolage and regulatory arbitrage. In retail banking, profitability was much less impressive and resulted mainly from cross selling and ramping up of transactions. These transformations were related to the emergence of a banking business model that was driven by shareholder value. A further aim of this chapter is to show how mainstream economics failed to understand banking and how the heterodox economists that got it right were right for the wrong reasons. The message is that finance and banking were not so much out of control as beyond control.
Keywords: banking, mainstream economics, Hyman Minski, heterodox economics, bricolage, post-Keynesianism, leverage, shareholder value, banking business model
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