Following Deep T.‘s regular probing analysis on the Australian banking system, the crew here at MacroBusiness often refer to the big four banks MegaBank. Yet we are not the first. I came across an enlightening passage from Keynes’s Treatise on Money that came very close to using the term MegaBank.
When introducing the concept of ‘bank money’ , the type of money created when banks write loans, Keynes notes:
It follows that the rate at which the bank can, with safety, actively create deposits by lending and investing has to be in a proper relation to the rate at which it is passively creating them against the receipt of liquid resources from its depositors.
For the latter increase the bank’s reserves even if only a part of them is ultimately retained by the bank, whereas the former diminish the reserves even if only a part of them is paid away to customers of other banks; indeed we might express out conclusion more strongly than this, since the borrowing customers generally borrow with the intention of paying away at once the deposits thus created in their favour, whereas the depositing customers often have no such intention.
If we suppose a closed banking system, which has no relations with the outside world, in a country where all payments are made by cheque and no cash is used, and if we assume further that the banks do not find it necessary in such circumstances to hold any cash reserves but settle inter-bank indebtedness by the transfer of other assets, it is evident that there is no limit to the amount of bank money which the banks can safely create provided they move forward in step.
The words italicised are the clue to the behaviour of the system. Every movement forward by an individual bank weakens it, but every such movement by one of its neighbour banks strengthens it; so that if all move forward together, no one is weakened on balance.
Thus the behaviour of each bank, though it cannot afford to move more than a step in advance of the others, will be governed by the average behaviour of the banks as a whole – to which average, however, it is able to contribute its quota small or large.
Each bank chairman sitting in his parlour may regard himself as the passive instrument of outside forces over which he has no control; yet the ‘outside forces’ may be nothing but himself and his fellow-chairmen, and certainly not his depositors.
Sounds like an apt description of MegaBank, and one reason that ‘competition in banking’ is not quite what economists imagined it might be. In addition to the benefits of promoting innovation in customer service functions, competition in banking simply encourages the average rate of lending to accelerate as each player seeks to improve their market share, with little regard the the effectiveness of that lending on investment in new capital. Thus, a competitive banking sector, to fulfil its social role of providing funds for the expansion of capital, needs clever regulation to ensure that lending standards are maintained.