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AG912 International Financial Markets and Banking

Assignment 2

Part B

Task 3 – Can we live without banks?


Student number: 201794685

Word count: 2218

According to Goyal and Joshi (2011), a bank is a financial institution, which plays the role of a
financial intermediary for numerous components of our society. The primary purpose of a bank is to
receive deposits and provide credits either by making loans or thrοugh capital market (Goyal and
Joshi, 2011). Goyal and Joshi (2011) in their study looked back in history and observed that banking
industry is among with oldest industries in the world. In fact, the first ever record of banking activity
can be spotted 4000 years ago in Assyria and Babylonia and later on in ancient Greece. But the first
modern bank is considered to be set up in Italy in 1157 and it was called ‘Bank of Venus’ (Goyal and
Joshi, 2011). As the years went by, we had the ‘Bank of Geneva’ in 1407, the ‘Bank of Amsterdam’
and ‘Bank of England’ in 1694. In the 20th century, technological advancements were made on
information and communication and this made the number as well as the size of banks to
dramatically increase (Trivedi, Chaudhary and Kumar, 2010).

Roengpitya, Tarashev and Tsatsaronis (2014) attempt to categorise banks in terms of their business
model; a ‘’retail-funded commercial bank’’, a ‘’wholesale-funded commercial bank’’ and a ‘’capital
markets-oriented bank’’. Commercial banks are defined as institutions that involve in two different
types of activities, taking deposit and lending (Kashyap, Rajan and Stein, 2002). They further argue
that the former type goes to the once side of the balance sheet and the latter on the other one. In
the current economic system, intermediation is an essential fact of finance and commercial banks
exist to make key financial functions, such as safeguard the savings, making loans, information
clearing, asset aggregation, more resourceful and less risky (Lin, 2015). Dow, Johnsen and
Montagnoli (2015), argue that money is created by commercial banks and traditional commercial
banks can be distinguished by their services into asset and liability. A report by Sullivan et al. (2014)
suggests that the main features of this type of bank include basic accounts, borrowing and lending
money, letters of credit, foreign exchange. At this point, I would like to mention why I chose this
particular type of bank to analyse. In my opinion, banks have always been an enormous part of the
world, both socially and economically. I want to enhance my knowledge on banks because I would
love to pursue a career in banking and it would be interesting to get to know what makes banks
indispensable and obsolete today. Therefore, I am going to present the main reasons I think banks
are necessary with their functions and, on the other hand, how they became less needed and the
public turned their back on them.

The following section will introduce and survey the literature on how commercial banks function and
how these functions make the banks useful for the society. Firstly, we have to make clear what the
main functions of a bank are. As many scholars have stated along with Allen and Santomero (2001),
the bank’s major role is to receive deposits and make loans. It is common knowledge that since
banks were created, everyone could understand that these main functions are beneficial for the
economic world. Imagine, for example, someone who has a fixed income, it is safer for them to keep
the money they wish in a bank account. The obvious reason is that contains less risk plus there is a
small interest involved from which the account holders can generate a profit depending on the
amount they deposit. Therefore, individuals and small businesses benefit from them. Furthermore,
an equally important function of a bank is making loans. Lending money is vital for business who
want money to operate and grow and sometimes they need additional funds for big purchases.
Thus, it is safely to say that banks provide liquidity in the market. At this point, it worth mentioning
what happened in Greece exactly two and a half years ago. From my own experience as a Greek
citizen, when all the banks shut their doors after Prime Minister commanded so, I remember clearly
that people, along with family members and friends, got terrified and scared. According to a BBC
report (Greek debt crisis: What are capital controls?, 2015), this Capital Control affected the whole
population in Greece and people who were visiting the country. Consequently, it is clearly seen that
when banks shut down or close temporarily for the public, that is catastrophic for the society since
the market is frozen.

Continuing this pattern, I think it is wise to mention some key functions of a bank in order to
understand their importance in our world. With the enormous advancements in technology,
commercial banks had to keep up and evolve. The new options that individuals and businesses had
with the electronic money, such as credit cards, were exciting. They can pay their liabilities without
cash and they can even pay for something when they do not have the money; a different type of
loan offered by a commercial bank. As a product of technological development, e-banking has been
the primary cost saving ‘tool’ for customers (Gautam and Khare, 2014). Sharma (2016) in her
overview underlines that the first bank to introduce interactive banking activities was Wells Fargo in
1995 after some unsuccessful attempts from Chase Manhattan, Citibank, Chemical and
Manufacturers Hanover in 1981. Gautam and Khare (2014) argue that e-banking brings convenience
when carrying out banking transactions. According to them, e-banking helped individuals in a
plethora of ways; not to worry about geographical limitations, no time limitation as well, because e-
banking does not have to operate on weekdays. Driga and Isac (2014) conclude that customer
satisfaction is a key element for banks to be trustworthy and to increase profitability and that is
being achieved with e-banking facilities.
In my opinion, another function that a commercial bank has and is similarly important as the
previous one is the foreign exchange department. A commercial bank can play vital role in the
foreign exchange market (Phillips and Rechtschaffen, 1997). If an individual or a business want to
trade or convert the currency of one country into the currency of another, it is a bank’s
responsibility. A commercial bank in these types of transactions provides insurance against fοreign
exchange risk and minimize the chance for risk, according to Phillips and Rechtschaffen (1997). They
further claim that multinational companies continuously need various currencies for their activities
and at the same time to hedge against foreign exchange risk. Breaking down how this function
works, a commercial bank acts as a brοker between the customer and foreign exchange market
around the world (Phillips and Rechtschaffen, 1997). Therefore, banks play a key role in such

As it was mentioned numerous times above, risk management and risk minimisation are correlated
with the commercial banks. Firstly, Allen and Santomero (1998) suggested that a bank operates as a
facilitator of risk transfer and can deal with the constantly increasing maze of financial products and
market. In their work, they conclude that banks’ customers need to manage risk when they trade, so
they do not trade in the dark without transparency. Three years later, they argue that it would be
too costly for individuals to minimise and manage risk without the existence of banks as an
intermediary (Allen and Santomero, 2001). They add a new element in this research; information.
They argue that without banks it would be too hard to overcome the informational barriers that
these complex financial obligations may occur. Lin (2015) also concludes that some of the benefits of
banks are management risk and ‘’information clearing’’ and that banks exist to make these
fundamental financial functions more efficient with less danger. Lastly, Badun (2009) shares an
interesting point that was derived from the literature and is that banks as financial intermediary and
economic growth co-move together.

In this section, I would like to analyse the foremost reasons that make banks obsolete as the years
go by. In my point of view, technology has improved as it has never been done before. The rise of
information technology has transformed several industries, and finance could not be an exception
(Lin, 2015). Lin (2015) also reviews that data analytics and ‘’automated online computer programs’’
are becoming the favored method of choice from both individuals and businesses. With the
assistance of the advancements on technology, many online platforms were created, and it made it
more convenient for people to trade there (Lin, 2015). Crowdfunding entities have also made it
possible for peοple to gain access to capital and money (Lin, 2015). To sum it all up, according to Lin
(2015), traditional banking seems to lose ground very quickly as information technology progresses.
The above was a brief introduction on how technology affected the public sees the banks and
intermediaries. In my opinion the major technological advancement that made banks to be
considered as ‘old-fashioned’ was the entry of the term Financial Technology, or FinTech. As Arner,
Barberis and Buckley (2015) have defined Financial Technology, they simply refer to the use of
technology to carry out financial solutions. Historically, they further argue that this term was first
heard of in the early 1990s and was called “Financial Services Technology Consortium”, which was
initially a project by Citigroup to facilitate technological support. FinTech today seems like a
‘’marriage of financial services and information technology’’ (Arner, Barberis and Buckley, 2015). The
global financial crisis of 2008 was a key reason that FinTech is rapidly evolving (Arner, Barberis and
Buckley, 2015; Catalini and Gans 2017). Along with FinTech, a digital tool was introduced and since
then it has changed the global financial system; cryptocurrency. Cryptocurrency can be thought as a
digital currency, and it uses advanced cryptography to produce money, complete transactions with
no costs (Nagpal, 2017; Chohan, 2017). Three years ago, Iwamura, Kitamura and Matsumoro (2014)
had counted to 100 cryptocurrencies and they are constantly increasing. Now there are several
cryptocurrencies worldwide that are gaining ground day by day, such as Bitcoin, Ethereum,
Primecoin (Chohan, 2017). Maupin (2017) concludes that Bitcoin is ‘’overturning world order’’ in
numerous ways. Bech and Garratt (2017), point out some of the advantages cryptocurrencies and
Bitcoin in particular have over banks. When a person makes transactions his/her true identity is not
being revealed, so Bitcoin has counterparty anonymity. Also, cryptocurrencies can help small
business when it comes to cost efficiency. For example, the cost of installing the system is much
cheaper than a ‘’paper payment system’’ (below one dollar) (Nica, Piotrowska and Schenk-Hoppé,
2017). They argue that cryptocurrencies are more efficient, quicker and low-cost. More explicitly, in
Bitcoin, no storage costs are required as well (Nica, Piotrowska and Schenk- Hoppé, 2017). Having
said that, it is clear enough that there are lots of alternative ways for someone to get into FinTech
and decline banks.

Another crucial part that makes banks obsolete and public does turn their back on them is frauds
and scandals. A lot of scandals have occurred in the past that question the trustworthiness and
confidentiality of banks. A globally known bank, HSBC, was found that they violated several rules.
They exposed the U.S. financial system to “a wide array of money laundering, drug trafficking, and
terrorist financing’’ (Fontevecchia, 2012). Additionally, as I can recall from my memory, the Wells
Fargo Cross-Selling Scandal that took place in 2013 also shocked everyone. It was reported that
approximately 30 employees got fired because they were opening accounts and issuing debit/credit
cards on their will, without customer knowledge and in some cases, they were forging signatures
(Tayan, 2016). As it was briefly mentioned above, the global financial crisis that shook the world in
September of 2008, can be described as the biggest ‘credit boom’ of all. The fact that in the center of
attention were credit rating agencies (the ‘Big Three’) and banks plays a crucial role in terms of levels
of confidentiality. It was a worldwide phenomenon that affected a lot of people’s lives. When it
comes to banks’ responsibilities, according to Jordà, Schularick and Taylor (2011), the foremost
significant reason for this global financial ‘meltdown’ was the lack of planning and οrganisation. To
conclude with, these series of scandals and events make people to lose their loyalty and trust on

Taking all the above into consideration, it is obvious that banks, given the rapid technological
advancements, the scandals that were involved and that they were one of the main contributors to
what has been the biggest financial collapse, can be abandoned by an amount of people. But, in my
opinion, if they face the progress in technology and information as a challenge and try to operate
onto the greater prosper ignoring the personal gain, we will in a better world along with banks.

Allen, F. and Santomero, A. (1998) ‘The theory of financial intermediation’. Journal of Banking &
Finance, 21, pp.1461-1485.

Allen, F. and Santomero, A. (2001) ‘What do financial intermediaries do?’. Journal of Banking &
Finance, 25 (2), pp.271-294.

Arner, D., Barberis, J. and Buckley, R. (2015) The evolution of Fintech: A new post-crisis paradigm,
University of Hong Kong Faculty of Law Research Paper. Available at:

Bađun, M. (2009) ‘Intermediation by Banks and Economic Growth: A Review of Empirical Evidence’.
Financial Theory and Practice, 33 (2), pp.121-152.

Bech, M. and Garratt, L. (2017) Central bank cryptocurrencies, BIS Quarterly Review. Available at:

Catalini, C. and Gans, J. (2016) Some simple economics of the blockchain, working paper. Rotman
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Chohan, U. (2017) Cryptocurrencies: A Brief Thematic Review, discussion paper. School of Business
and Economics, University of South Wales, Canberra. Available at:

Dow, S., Johnsen, G. and Montagnoli, A. (2015) A critique of full reserve banking, Sheffield Economic
Research Paper. Available at:!/file/paper_2015008.pdf
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University of Petroşani, Economics, 14 (1), pp.41-50.

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Economics, Business and Management, 1 (2), pp.54-56.

Goyal, K.A. and Joshi, V. (2011) ‘A Study of social and ethical issues in banking industry’. International
Journal of Economics and Research, 2 (5), pp.49-57.

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Iwamura, M., Kitamura, Y. and Matsumoto, T. (2014) Is Bitcoin the Only Cryptocurrency in the Town?
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Kashyap, A.K., Raghuram, R. and Stein, J. (2002) ‘Banks as liquidity providers: An explanation for the
coexistence of lending and deposit‐taking’. The Journal of Finance, 57 (1), pp.33-73.

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Studies. Available at:

Nica, O., Piotrowska, K. and Schenk-Hoppé, K.R. (2017) Cryptocurrencies: Concept and Current
Market Structure, FinTech working paper. University of Manchester. Available at

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reverse bank in domestic capital markets’. Fordham International Law Journal, 21 (5), pp.1754-1771.

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