South Africa should reconsider the use of reputational risk as a debanking mechanism

THE doctrine of public good, in relation to modern banking or banks, was introduced as early as 19th century.

- REDGE NKOSI

In more recent times, the notion that banks are a public good has been articulated more sharply by careful scholars in economics, having had regard to what money is and what banks do. It is now settled that banks perform a public good function.

Classical and neoclassical theory however, the type of doctrine religiously followed and evangelised by Treasury and the Reserve Bank, erroneously conceptualised banks as mere financial intermediaries whose role in the economy can be replaced by any other firm, consequently subject to the theory of a firm just like all other firms.

For banks, this means they receive money (deposits) for safekeeping on behalf of depositors.

They can then lend part of the pooled money to households and firms, perhaps including government.

Therefore, any firm, with secure enough vaults can safekeep deposits and lend at any such needed time.

With this erroneous view so perverse, the public good doctrine would hardly apply to banks.

Banks are creators of money supply through their role in purchasing securities. This makes them not only macroeconomically important, unlike in neoclassical thought, but a must for any economic activity. This implies that households, firms and institutions cannot operate without a bank, unless we go back to cave periods.

But what is a public good? Originally, a public good is one associated with it being financed or created/built/ owned by the State or created by the private sector on behalf of the state such as roads etc.

While this may still be true today, the concept has evolved significantly, to include many goods provided by private sector that may ordinarily be deemed as private.

In all instances, a public good must have, as one of its core characteristics - the fact that it is a non-excludable - meaning that the potential clients cannot be excluded from its consumption.