The Principles of Banking, 2nd Edition

Foreword

Oldrich Masek III

For the most part, banking's principal purpose has not changed since its formal advent in the 1400s; specifically, it affords a safe means to intermediate savers and borrowers such that underutilised capital can be efficiently recycled within an economy. What has changed, however, is the efficiency and speed by which this optimisation process manifests; each has increased dramatically as a consequence of digital connectivity and the globalisation of world commerce. Digitalisation, in particular, has allowed for alternative forms of financial intermediation to develop, collectively referred to as the “Shadow Banking Industry”. In its most basic form, the Shadow Banking Industry connects savers and borrowers more directly by bypassing the regulated banking system. While this direct connectivity model can be more efficient as well as provide financial access to individual and corporate borrowers not served by traditional bank lenders, it introduces alternative challenges to the “health” of the financial system. In many ways, “savers” should more appropriately be deemed “investors” given they don't benefit from the safety net afforded by having a regulated bank standing in the middle of the financial intermediation process. Rather, the “investor” is placing their monies directly with the borrower, consequently taking direct exposure to the creditworthiness of such borrower.

Whilst both financial intermediation models (regulated and unregulated) have economic ...