Banks have changed radically over the past 50 years. In the classical model banks functioned as “intermediaries” channeling savings into investments via loans. The Banking Acts of 1933 and 1935 prohibited checking accounts from paying interest on their deposits and limited the interest that could be paid on time deposits or savings accounts. In 1970 two American businessmen invented the money market mutual fund which offered investors an alternative to bank deposit accounts. Since investors were buying shares of a fund rather than “depositing” the money in a bank account, the fund was not subject to the regulations regarding banks. It was able to offer higher returns than a savings account with minimal risk.

As the stock market flourished in the 60s and 70s, it began to compete for the funds that had previously been deposited in savings accounts or certificates of deposit. People wanted the greater returns that could be had with securities as opposed to a savings account, and it became increasingly difficult for banks to attract deposits and make a profit on its loans. They began to rely on fees for their services to bolster their income, and they began to lobby for the repeal of banking regulations in order to be able to make a profit. Gradually regulations on banks were scaled back until they were in effect completely eliminated in 1999.

Most banks are businesses run for profit, and they have increasingly been run like other businesses answerable to shareholders. Part of this has been the increased reliance on borrowed money. Banks can borrow money from the Federal Reserve at a low rate and lend it to businesses at a higher rate. Once they were no longer restricted in terms of the kinds of investments they could make (theoretically with their depositors funds), the banks began investing in securities of all sort. This eventually included the ability to originate loans and the get them off their books by “securitizing” them. The distinction between commercial banks and investment banks was all but eliminated in 1999, although some attempts to reintroduce regulations of banks have been made since the financial crisis. [see Financialization]

After the invention of money market funds financiers found a host of other ways to channel investors’ money into investments that competed with banks ability to finance via loans. What developed was termed a non-banking financial institution which was a financial institution without a banking license and not subject to the same regulations as banks but able to provide most of the services of a bank. It has also been called the “shadow banking system.”

Because of banks’ role in the creation of money and the financing of businesses, they should be regarded as public utilities rather than for-profit businesses. This is not to say that banks need to be run by the government even if they are initially funded by the government, but they obviously need to be regulated. Banks could be co-operatives or community-based non-profit organizations comparable to a development agency answerable not to share holders but to the community which they serve.

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