Reform the banking system

The banking system used to be one of the core mechanisms by which countries grew economically. There are countless examples in history, the most recent being Germany after WWII up until the 90s and China under Deng Xiaoping. In these two cases, banks used to be an engine for growth because they were highly regionalised and used to lend money for new business ventures. The highly specialised SME sector in Germany grew mostly from bank lending, however, this all changed with the introduction and growth of the Basel regulation and banking regulation overall. High regulatory burden increased the fixed costs of doing business for banks. Thus, we have seen a secular trend in banking consolidation because smaller banks don’t have the economic scale to pay for that fixed regulatory burden. Big banks tend to lend only to big corporations because the cost of approving a 10 million euro loan is roughly the same as a 300k loan. So big banks will always choose to serve big corporations because that's the scalable way for them to beat their revenue targets.

Banking regulation also disincentivised banks to invest in private SMEs and startups by extension because the Risk-Weighted Assets (RWA) framework imposed by the Basel regulations penalises banks heavily for doing so. As a result, the banking industry has largely shifted to providing financial services to big financial institutions looking for leverage, big corporations as well as the real estate market (given the collateral aspect of the loans).

As a consequence, the current regulations, which have been growing since the 80s, end up:

• stifling sustainable economic growth (depressing the growth of the supply side)

• consolidate the banking sector

• create housing bubbles

• lead to asset price inflation

We need a new framework for banking, one that promotes:

• a freer market

• innovation and lowering the regulatory barrier to entry to startups

• promote lending and investment to productive means