Banks used to make money by holding quality assets in their own portfolio. Banks were then conservative because no bank wanted to own a non performing loan. Bank officers were rated on the quality of the loans they originated.
Over the years banks have transitioned into fee based financial organizations. The loans and securities are just commodities to be traded. Local banks which knew the parties involved in the loans they made are less important as their porfolios are freely traded among national and international organizations.
Bank officer’s performance became more short term, based on the fees generated rather than the quality of the loans. Competition has reduced unit charges and driven the quest for volume, leaving institutions creatively rationalizing shifts into unacceptable quality.
Banks have had a crisis every ten years for some time. Any serious banking reform should address the shift to fee based perfomance, which diminished the incentive to originate quality loans.
That will be tough to execute.
Recent Comments