Here is an excerpt from CFA Insitute by Manuel Stagars, CFA, CAIA, ERP of a book review on The End of Banking: Money, Credit, and the Digital Revolution by Jonathan McMillan followed by a little something from Amazon.
Announcing the demise of the financial system as we know it has become popular in the aftermath of the Great Recession. In fact, the Financial Times has dedicated an entire series to the topic, aptly named Death of Banks, wherein author Izabella Kaminska chronicles the downfall of traditional banking.
A recent book called The End of Banking: Money, Credit, and the Digital Revolution goes one step further: In addition to carefully explaining how the financial sector maneuvered itself into the financial crisis of 2007–08, it presents several unconventional ideas to do away with regulatory capital arbitrage that sticks taxpayers with the bill for bankers’ risk taking. The book proposes a fairly straightforward policy framework that promises to reduce shadow banking, decentralize financial services from too-big-to-fail banks, improve regulation, and realign the private and the public sector with transparent monetary policy.
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Banking in the Industrial Age: Banks as a Sensible Approach
Written by two authors — one an investment banker, the other an academic with a PhD in economics — under the collective pseudonym Jonathan McMillan, the book begins with an explanation of banking in the industrial age. The authors define banking as “the creation of money out of credit,” where the function of traditional banks consists of addressing information asymmetries and mitigating credit risk, matching differing maturity needs of lenders and borrowers, and facilitating transactions with payment systems. Since borrowers prefer loans with large notional amounts and long maturities but lenders prefer loans with small notional amounts and short maturities, matching the differing needs of lenders and borrowers is the essence of banking. As a welcome side effect, banks also multiply deposits several times on their balance sheets and thus create inside money.
Fractional reserve banking works well until a bank run occurs, which is the Achilles’ heel of banking. When it takes place, a bank run can lead to a banking panic, which results in a credit crunch. Financial regulators are aware of this. To avoid runs on banks, they introduced deposit insurance and lender of last resort facilities, which resulted in people today feeling little difference between holding cash at home and maintaining a balance in their bank account. Depositors thus care less about a bank’s risk profile than they should, and that entices bankers to take on undue risk with other people’s money. Limited liability motivates excessive risk taking.
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The End of Banking: Description
In this thought-provoking book, Jonathan McMillan dissects banking to reveal its inner workings. He cuts through the complexity of modern finance and explains how banking almost crashed our financial system. Banking is broken, and McMillan reveals why we can no longer fix it.
The digital revolution turns out to be the game changer that calls for the end of banking. But McMillan refrains from merely pointing out flaws. Building on economic research and a rigorous analytical approach, he goes on to provide an innovative blueprint for a modern financial system.
The End of Banking transforms our understanding of the financial system. It identifies the root cause of today’s problems with banking and presents a solution that stands out against existing reform proposals.
We can do better than banking.
The End of Banking: Review
“thought provoking, bold, and visionary” (Foreword Reviews, Barry Silverstein)
“Sometimes it takes an absolutely new perspective to point out the elephant in the room that everyone else has managed to overlook. The End of Banking: Money, Credit, and the Digital Revolution … does just that.” (Financial Times Alphaville, Izabella Kaminska)
“a great contribution to the current discussion of monetary reform, especially because it is firmly grounded in the reality of banking and financial affairs and shows a creative way out of the mess we are finding ourselves in.” (P2P-Foundation, Sepp Hasslberger)
From the Inside Flap
The End of Banking: Money, Credit, and the Digital Revolution distinguishes itself from other books about the financial crisis of 2007-08 in several ways.
First, it reveals the fundamental financial techniques that are common to all forms of banking–whether it is performed by medieval goldsmiths or by today’s managers at investment banks.
Second, it offers a lucid and accessible account of shadow banking that will enlighten many readers.
Third, and most importantly, The End of Banking: Money, Credit, and the Digital Revolution does not rehash the same old regulatory patches or radical reform proposals from the past. Instead, it elaborates a new and intuitive idea of how to adapt the financial system to the digital age. –This text refers to the Hardcover edition.
The End of Banking: Money, Credit, and the Digital Revolution by Jonathan McMillan