We can approach commercial banking as having three main roles: making loans, facilitating payments, and taking deposits. This chapter starts with these functions, looking at the risks and how they might be addressed. It also suggests that the banking industry has spread too widely into other services and become too powerful.
Loans
Bank loans facilitate both new and existing economic activity, creating money as necessary to achieve this.1 Doing this in a way that maximizes activity without taking too much risk is a challenging intellectual activity. Michael Manove and colleagues provide a challenge for those evaluating loans in banks by suggesting that they are lazy if they rely too much on collateral rather than on careful evaluation ...
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