William Black, a former US regulator and Professor of economics, talks on TED about how to “Rob a Bank”. Interestingly he states the average Bank robbery nets $7500 dollars but when it's done at corporate level, accounting fraud it nets much more.
He notes there are 4 basic steps in his guide to “robbing a Bank from the inside”.
If a Bank employs these 4 basic steps the following will happen.
The resulting factor is the Bank is put in a situation where it could fail as it did with Lehman Brothers. When the credit crunch happened in the US it cost the government trillions of dollars to stop the Bank’s failing and millions of jobs were lost. It affected almost every person in the US with higher taxes because of the increase in national debt whilst a selected few became rich.
The question is; if it was the senior managements own money would they have employed these tactics. Obviously the answer is probably a no as they could have lost their own money.
Bank’s lending other people’s money is flawed as ultimately they are not responsible for the loss.
The FCA and PRA have been changing the rules to help battle this problem and their approach now considers integrity & conduct making CEO’s and senior management more accountable for their behaviour. However I draw you back to the fundamental problem; the money is not theirs. There will always be an incentive for senior management to push these boundaries for his/her own personal gain whilst there is no immediate risk for them.
I believe Bank's have a place in our society for big business and account management but the retail market for them is definitely changing.
The FCA and PRA are implementing further rules to try and combat future catastrophes but they do not have a crystal ball and it is nearly impossible to predict the next crash and how and when this may happen.
The one thing you can count on is human nature and whilst there is no fear of loss for a Bank's senior management the fact remains that we are at risk of another crash in the future.
This is why I believe Crowdfunding is the answer. If the person issuing the loan is ultimately responsible for the debt this reduces the risk to the economy in terms of bank bail outs, and job losses. Too many loan decisions are made on computers and based on an analysts risk assessment. This is not a true evaluation and can be led by a Bank's overall take on the market and how much profit it wants to make. This means the right people do not necessarily get the right loans. Savers may get a low rate of interest whilst the Bank analyst is making decisions without little risk to themselves. The Bank also has a large inherent cost in the middle which includes offices, high st branches and large salaries which can cut into the savers potential profits
I think the small loans market is a problem for the Bank's. Its labour intensive and they have to rely on programmes that asses the whole of the market rather than tailored to specifics, sometimes with little return. I think there has to be a shift in the market for savers and this is where Crowdfunding comes in. Although there are risks when investing through crowdfunding sites, early signs are that savers are getting increased returns of interest in comparison to a standard savings accounts, which includes an allowance made for defaults. This varies from site to site but we are starting to see competition, not only on the rates offered but also on the default rates of the Crowdfunding sites meaning that these platforms are being cautious about who they put forward for finance. This way of doing business ensures the lenders are responsible for their actions. The investor potentially receives higher returns and it’s a human being that makes the decision on the loans going to the right people.
businessagent.com is an equity and loan crowdfunding aggregator where you can find and compare crowdfunding sites. They list equity crowdfund pitches where you can become a mini venture capitalist and invest in start up businesses. You can peruse a full list of crowdfunding platforms that specialise in a range of activities from becoming a lender to investing in environmental activities like solar farms. Most sites allow you to invest from £10 upwards and the investments are sometimes available on SEIS or EIS tax schemes where the government could possibly credit you up to 50% of your investment back against your income tax. The government are also talking about allowing ISAs to be invested through crowdfunding, this is still under discussion though.
As the crowd starts to connect with one another and builds trust in crowdfunding this movement will start to become the norm. Crowdfunding is not a fad, it grew by 371% in 2012 to 2013 and the alternative finance sector as a whole has attracted investment worth £1.74 billion over the past two years in the UK.
The internet changes business models by connecting people direct to the source and cuts out the middle man lowering costs for the consumer. In this case is the Bank a middle man and Crowdfunding the solution to Banking? Sacha Bright, CEO and Founder, www.businessagent.com
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