In the US, Biden has assured voters that no taxpayer money would go to at-risk banks, but trust in the system relies on such support
Banks are a special type of organisation. They take deposits and lend these funds to borrowers over long periods. It is pretty remarkable when you think about it. Banks make loans over many years, but you and I can withdraw the savings that banks use to fund the loans instantly.
For banks to operate this franchise model profitably, they essentially rely on two ingredients. First, they need to earn a profit by charging higher interest on long-term loans than they pay on short-term deposits. This model has come under severe strain in recent years. Owing to high inflation now and lower expected inflation in the next few years, many banks currently pay more for deposits and other funds than they earn on long-term loans and other assets. This makes the traditional banking model loss-making and raises questions about what the assets of some banks are worth if they had to be sold now.
Jens Hagendorff is professor of finance at King’s College London
