After investigating the case of JP Morgan, the error resulting in a loss of over two billion dollars, all sorts of information have been circulating about the banking system. Most times, people misinterpret the role of banks in society, which can lead to bankruptcy of the entire global society, reports Business Insider. Private banks, in their essence, are credit institutions with the goal to maximize profit. They function as organisms which intermediate services in the monetary system. Therefore, in order to attract investors, financial institutions offer different products and services.
When we think of the goal of a bank, we must keep in mind that private institutions like these are aimed at obtaining profit and not give people easy access to payment system. And they are not charity organizations. In short, their main objective is to make money. Most times, the two directions do not conflict, but in some cases the risks taken by banks could endanger the system. Despite the bad image of the credit institutions, their services have most often a positive impact on global society.
Bank accounts, credit cards, debit cards, investment services, hedging services, etc. are elements that contribute to the stabilization of a secure and stable monetary institution. If we consider the fact that money is a financial instrument, a social construct, then the banks are the ones that created products and services to help facilitate the use of this tool. If we think what the work on Wall Street is like, we see that American traders are not intended to create jobs for the private sector. Their only concern is to generate profit for the corporations they work for. This is the essence of private banking, generating profit.
Banks have a unique role in today’s capitalist system. They are not the engine of capitalism, but the oil that ensure proper operation. When the larger banks take actions that threaten their operation, elements of the system begin to function improperly. When these mistakes escalate at a catastrophic level, disruption by contagion reach the entire system, which then requires an intervention to balance itself, as it happened at the start of the financial crisis in October 2008.
For example, when a bank granted a mortgage, it uses a long-term perspective and will predict the outcome. It assesses the credit risk and evaluates the customer as a potential element of generating profit for shareholders.
Banks rely heavily on risk analysis. A responsible credit institution manages risks, understanding how different parts of the business can threaten the stability of the entire company. With that said, we conclude that banks with problems have not properly analyzed the risk management. And this happens frequently. Investors, people generally, are irrational, ineffective, not well trained in risk analysis associated with a complex dynamic system. Banks, as a loan supplier, are a way for the people that don’t have the necessary resources to get them. In return for the loan, customers are required to pay a fee, an interest. If there is no interest rate, demand for loans would increase greatly. Also, if banks would use lower standards to facilitate credit, then they can not properly analyze the risks. They will provide money to people who can not meet their duties, thus endangering the viability of the system. Moreover, getting credit is a privilege, not a right. We need to understand that although banks are pursuing profit, they are the preferred alternative of a government controlled system.
As for the scandal in JP Morgan or the onset of the crisis in 2008, the fault lies with all parties involved. Homeowners were greedy, and banks rushed to convert excess demand in higher earnings per share. If the banks would be “the oil” to help “the engine” of global economy to function, they should be a component carefully monitored, which has to obey strict rules. Despite recent changes, these features are not yet observed. As a result, people continue to believe that the capitalist system is corrupt, when in fact users, lacking information, have abused the system.
In conclusion, the wrong element of this equation lies in misinterpreting money as a tool and how customers are influenced by modern banking system. Both creditors and debtors were allowed to abuse this social construct. A closer surveillance of the banking institutions do not necessarily contribute to solving current problems, but can prevent possible errors.
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