The International Politics of Surplus Capacity (Routledge Revivals) by Strange Susan;Tooze Roger;

Author:Strange, Susan;Tooze, Roger;
Language: eng
Format: epub
Tags: Social Sciences
Publisher: Taylor & Francis Group
Published: 2009-12-15T00:00:00+00:00

Surplus Capacity in Banking

The mythical banker sits sternly behind his imposing desk, rejecting more often than not the loan applications of the supplicants who come before him. A bank is supposed to be a conservative institution which lends money that has been deposited with it. Profits arise from the difference between the interest paid to the bank by borrowers and the interest paid by the bank to depositors, less expenses. Prudence and regulations dictate that some percentage of deposits be held as reserves and in securities. When loan demand is slack, banks might increase their holdings of securities. They should not cut the rate at which they will lend so far that they cannot make profits. Neither should they accept lower-quality borrowers simply to boost loan demand. This view of banking retained popularity at least until 1970–1 when it ‘was the consensus of financial economists…that the following decade would likely witness strong demands for funds relative to the available supply’ (Hayes, 1971, p. 39).

In the past two decades, however, bankers have in fact been globetrotting executives seeking new borrowers wherever they might be lurking. The return of European currency convertibility and the launching of the Common Market in 1958 attracted transnational corporations into Europe throughout the 1960s. American banks rushed in after them. Others followed.

In the late 1960s Citibank introduced the concept of liability management. Banks borrowed money from other banks or central banks in order to relend it. More liquidity was created. Go-go bankers of the 1960s and early 1970s were no longer content to borrow long and lend short. It is extremely doubtful that the growth in sound borrowers came close to the growth of potential lenders eager to expand their Eurocurrency operations. In Hyman Minsky’s terms, national economies and the international economic system became more fragile. Most banks became willing to lend to countries and to large corporations (private or state-owned) on better and better terms. Hedge finance, where borrowers are able to repay the interest and principal from a project’s cash flow, was replaced by speculative finance, where only the interest can be repaid from projected cash flow. Sometimes banks were not even assured that a borrower could repay the interest owed from the specific project (Minsky, 1975). Nobel laureate W.Arthur Lewis commented (Lewis, 1978, p. 65):

But why should they [the borrowers] be called on to repay? A bank lends money to earn interest. So long as the interest is safe, there is no need to repay the principal. The loan can be rolled over. A customer who insists on repaying is just a nuisance who is putting the banker to the trouble of finding another customer.

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