Banks came into being with the growing ubiquity of money. With their beginnings in Renaissance Italy, they facilitated payments, often over wide distances, offered safekeeping and granted credit. They were private enterprises.

The feudal state, in permanent need for cash, had no business in telling their sponsors how to do their trade. It was a delicate business, built on good bookkeeping and cunning. Not to go under was a rarified art form, reserved for the daring, rich and well connected.

Banks in modern times based their business models along similar lines, initially. Lending was their economic justification. Many bank runs and a Great Depression later, the state and newly established central banks had to vouch for their standing. The universality of banking made it a public good. To risk bankruptcy was not a private affair anymore. The well-being of nations depended on the stability of banks.

A dazzling array of newly invented financial instruments and securities made banking supervision a difficult, yet indispensable task. We expect financial authorities to monitor and weigh every aspect of risk, to make sure that the spouts of credit remain open. Without continuous supply of money, a modern economy will go under.

Banks transform idle deposits of savers and current account holders into loans for households and industry. We have not abandoned this idea yet, despite the fact that banks do many other things nowadays. They trade currencies, derivatives, securities and any conceivable form of financial wizardry.

At the same time, loans are generated elsewhere: by bond markets, private equity, asset mana­gers, pawnbrokers, loan sharks, crowd funding pools and even consumer goods companies like Amazon and Apple.

Every time a bank is in distress, central banks and governmental agencies make sure that the flow of credit stays uninterrupted. Banks are ‘saved’ for this purpose, and more intensely regulated thereafter, at least for a while.

The latest banking troubles, which manifested themselves in unexpected mass withdrawals of deposits, demonstrated the difficulties of supervising banks. If their central function, to transform deposits into loans, is in question, we should come up with new concepts how to better organise the business of deposit-safekeeping and credit granting.

If banks want to have a role in this, they have to demonstrate their continuing indispensability. This involves questioning guiding values, the modes and adaptability of regulation, the effects of management incentives and the appraisal of competition. Financial organisations ‘too big to fail’ are a risk too big to accept.

By issuing digital currencies, central banks could be our current account holders- Andreas Weitzer

I gained my first experience in banking as a law graduate in Austria. Banks, having survived the war in name only, still had the hallmarks of their reestablishment: their struggle to gain the confidence of customers, who had been robbed, expropriated or dispossessed by hyper-inflation.

For savings and cash to re-enter the credit cycle, full anonymity had to be granted. A savings account was a nameless, bearer instrument guaranteeing withdrawals to anyone presenting the booklet.

Cash, even bags of cash, was money unquestioned. Tax avoidance was chased by the Inland Revenue, not bank clerks. The main task of a bank was to grow its business by accumulating deposits. No deposits, no credit business. Bank branches were opened on every corner for this purpose. This was costly but guaranteed close contact to customers.

Saving was encouraged at schools, at home and in savings clubs. The ‘World Savings Day’, when we children emptied our piggy banks at the cash counter once a year, was a feast encouraged by banks with gifts, souvenirs and memorial coins.

Customer contact worked both ways. Account managers would know the business or employment details of their customers. They would know them personally, including their family ties. They could charge their reliability and trustworthiness in matters of debt. They would grant loans based on such personal links.

The head officer of a branch could decide personal loans or small business loans without mandatory check lists or head office confirmation. The ability to repay was central, no sureties. When a business listed, the business owner and his account manager worked it out. With leniency and the understanding that bankruptcy would not benefit anyone.

This bond of trust was disrupted when banks started to ‘securitise’ their loan books and sold it to the anonymity of markets. It made sense to unburden their capital, but business owners were now on their own. Then banks began to save costs by reducing their branch network. To ‘know your customer’ was made difficult when tasks were centra­lised and account officers became first interchangeable, then disempowered, then obsolete.

Help lines and ‘internet banking’ cut the bond with cus­tomers. The old give-and-take was replaced by the commodification of banking. Algorithms decided questions of due diligence, credit risk and cost-benefit analysis. My BOV branch in Attard is still a very personal affair, but who knows for how long? For newcomers to open an account is already becoming ridiculously difficult.

All classic banking tasks can be executed by non-banks these days, from money transfers to lending. And what’s with our deposits and current accounts? They could be much safer kept at central banks. By issuing digital currencies, central banks could be our current account holders. Thus they could better control the growth of money, facilitate free mo­ney transfers and dictate desired interest levels, while funding banks directly.

As the economist and former Greek finance minister Yanis Varoufakis expounded in a recent piece for the Project Syndicate publication, to fear the intrusive hand of the state would be beyond the point. Every payment we make can be controlled by police, intelligence and the Inland Revenue already.

To avoid control by staying in cash necessitates a shady existence strictly outside the financial system. The celebrated anonymity promised by the invention of private, digital currencies too turned out to be a mirage. Block chain technology is an open book.

Central banks and banking supervision authorities are in a bind today. They can maintain the old banking system and try to keep it safe by ever more intrusive rules. Every banking activity is “risk weighed”, imposing ever more detailed capital requirements based on the experience of past failures.

This did not prevent the recent bank run, when ‘safe’ investments in government bonds, with a ‘zero’ risk weighing, devaluated in tune with rising interest rates, and deposits proved less sticky than generally assumed. For this loss in stickiness the banks themselves are to blame, as I have pointed out above.

New risk provisions will be added. Or central banks can take over from banks and become the sole dispenser of credit themselves. Not even CCP-controlled, dirigisme China has come up with such an intrusive solution yet. A market-based allocation of capital would be replaced by bureaucratic fiat.

Finance columnist Matt Levine of Bloomberg wittily pointed out that if bankers would be paid their bonuses with their bank’s Contingent Convertibles ‒ bonds that are wiped out in a liquidity crisis ‒ and forced to hold on to them until retirement, rather than being paid in shares, their attitude towards risk would be tamed considerably.

As things stand, we will stagger along and muddle through. More failures, more rules, less banking as we knew it. The concept to get back to basics and actually serve customers may have been gone for good. Smaller, nimbler, less regu­lated banks are disappearing fast.

Big banks, getting bigger with every bust of their smaller rivals, have the power to ignore us. They have also the unopposed power to necessitate ever more disruptive rescue operations.

I doubt that this is what we wished for.

Andreas Weitzer is an independent journalist based in Malta.

The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.

andreas.weitzer@timesofmalta.com