Notes And Communications

This communication sketches in headlines long term developments in American and European banking. Contrary to the expectation of both practitioners and theorists in the nineties, has the role of banks in the economy not diminished but increased. This is demonstrated by the long term increase of bank credit as a percentage of GDP (resulting in a stronger growth of M2 and 3 than GDP), a growing contribution of bank sector income to GDP, growing employment (until recently) and a growing share of bank shares in total market capitalisation over the past three decades until 2004–2006. This growing share may have been induced by a comparatively superior performance, supported by a relatively high dividend yield, despite a lower-than-average price-earning ratio. Banks counteracted increased competition and disintermediation tendencies in their traditional lending business by a progressive involvement in capital markets. They developed themselves, in several functions, these markets. For this reason the often used distinction between bank-based and market-based financial systems is less meaningful. Capital markets function thanks to banks. Even more because a rapidly growing volume of new, unlisted investment instruments are constructed by banks and traded over their counter. By this development the risk absorbing and intermediating function of banks – being their basic function in the financial system – is also accentuated. The professional capability of leading banks to fulfil this basic function has in the current “sub prime” crisis come under severe criticism.