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Why We Need Banks

10:17 AM Tuesday June 15, 2010 

by Sir Andrew Likierman  | 

(Editor's note: This post forms part of the month-long HBR Debate, "Finance: The Way Forward." It is the second post on this week's topic: "Do we really need banks — and what might take their place?")

"Neither a borrower, nor a lender be;

For loan oft loses both itself and friend

And borrowing dulls the edge of husbandry" (economy?)

If only bankers had followed their Shakespeare, we wouldn't have had a subprime crisis. But then there wouldn't have been any banks, and take away the banks for the 400 years since Hamlet and we would still be riding horses, mixing eye of newt and toe of frog to cure our toothache and generally living nasty, brutish and short lives. 

But banks are not only useful for innovation and wealth generation; they also make excellent scapegoats when things go wrong. Come famine, social unrest or economic downturn, the bankers are in the list of villains. Over the centuries there have been plenty, including bankers, who have stolen from widows and orphans. Bernie Madoff is only the latest in the list of the disgraced. But among the vast majority of the honest banks, many have done well, making rich some who worked in them. It's never nice when other folk earn more than we do. And when they earn ten times as much as we do, it's ten times as irritating. 

Now let's move to the realities. Banks — including investment banks — are not an accident. They have developed over thousands of years to meet commercial needs and will have to go on developing to survive. They lend money on the basis of risk, which means some of it will be lost. And they are not homogenous. Some are truly excellent. Some are truly rubbish. Most are in between and operate on a modest scale, a world away from complex financial instruments. Banking is not all Goldman Sachs.

Do we need banks? Yes, or rather we need institutions to do what banks do. They need not be...