Banks

Banks

Banks are a handy invention. They provide a safe place to store everyday money and, so long as you a meet certain criteria, a place to borrow money for items too costly for everyday money.

Banks also have a stupendous business model. There is no more profitable commodity to trade than money. Everybody needs it and is prepared to pay a premium for access to it. This willingness to pay even helps banks manage their risk of not holding enough capital to cover their obligations because most people do the right thing and make their repayments.

Even psychology is on their side.

Despite such a stupendous business model bankers are sharp to opportunity and the squeeze to profit is ingrained in their culture.

Last year in Australia the four main high street banks declared an after tax profit just shy of $14 billion and account for around 80% of the systemic risk in the financial system. They play a big game.

And the rhetoric is that we need them to play. If the flow of cash stopped, then so would everything else. Our system of trade and exchange requires that both capital and cash flow. Deals have to be done to ensure that a new housing block is built, paying tradesmen and providing homes for people to fill with white goods and flat screen TVs.

Banks profit from all of these transactions as they provide capital, credit and a place to store cash for a fee.

The question is how much should they profit? Is $14 billion in profits fair? It is enough to pay roughly 176,000 people the average wage for a year or 400,000 people the minimum wage. The number of people recorded as unemployed in Australia as at November 2016 was 725,000.

Remember that profit is the money made over and above the cost of doing business, paying taxes, and executive bonuses.

Of course, some profit is distributed as dividends to shareholders and so is fed back into the economic system. And without this redistribution, the money would not have been mobilised toward profit in the first place. So care is needed here.

It is too simple to imply that $14 billion could make a serious dent in the unemployment rate. But it is worth a thought.

At what point does society collectively say that enough profit is enough?

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