Banking: A Very Short Introduction (Very Short Introductions)

Covers all the basics of banking - retail, commercial and investment - in a clear and simple style. In depth discussion of the 2007 financial crash, its causes and repercussions. Doesn’t assume prior knowledge of economics on the part of the reader. Highly recommended!

I read this book to consider using it in an undergraduate survey course on international business. Unfortunately, it isn’t really suitable for readers who are truly beginners in finance or economics.A strength is that the book covers a wide range of material. But it does so in a very bankerly, top-down, facts-from-the-experts exposition, making no effort to charm the reader or engage his or her imagination with controversies, a mix of points of view, or open questions for the future. For example, when the book discusses pools of borrowers or loans that have very precise risks of default (2%, 10%, etc.), it never explains how these assessments are arrived at, much less consider whether there may have been some flaws in the ways in which these risks have customarily been assessed. And from the authors’ presentation of the “deposit expansion multiplier” (@64-66) you would never guess that even one of the US Federal Reserve’s own economists has suggested that the multiplier is a myth (see “Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?” (2010) by Seth Carpenter & Selva Demiralp).About 40% of the contents of the book is devoted to the 2007 financial crisis (Chaps. 6-8). Matters more familiar to the general reader from daily experience, on the other hand, don’t get as much attention. Payment systems affect everyone daily, and so might interest the reader curious enough to pick up a skinny book about banking. Yet they get less than a page and a half, a good chunk of which is taken up with descriptions of ATMs and various types of cards at this level of detail: “Credit cards allow customers to pay for goods and services with funds that are effectively loaned by the credit card company. The customer receives a monthly statement, and may choose to pay off the full balance, or pay a portion and incur interest on the balance.” Period. (@24.) Sort of the financial equivalent of my school biology textbook’s observation, “Birds are beautifully adapted to flight.”Aside from offering a dry presentation, the authors assume some familiarity with the subject matter. There is a glossary, but it is far from complete: e.g., you should understand on your own what a “security” is and what the “notional amount” of outstanding derivatives means (@46). You should also be familiar enough with reading supply/demand curves that you can easily construe the one the text provides for interbank lending rates, which isn’t the familiar curved X-shape (@66-70). (To be fair, it’s a conventional textbook presentation of the topic, but that’s no guarantor of clarity, especially for beginners.) And even I had difficulty in staying focused on flood of verbal descriptions of investment vehicles and derivatives contracts (@21-22, 45), although I’ve encountered most of them in the past. Pictures would have been a great help.There are also some incorrect or misleading statements. One is that capital is a liability (@57); another, that derivatives, including swaps, are securities (@45). There is also an ambiguous use of the word “includes” that is most naturally construed as implying that hedge and private equity funds are part of the “shadow banking” system (@21-22). Each of the latter two statements is true only exceptionally, not as a rule. At least in the US, *some* swaps (security-backed swaps) are regulated as securities, but many of the most common types (interest-rate swaps, forex swaps, etc.) are not. *Some* hedge funds and private equity funds (the ones involved in providing credit) might aptly be included in the shadow banking system, but most others would not. A reader hitting this material without knowing much about the financial services industry could get easily misled.The way to improve this book for a second edition seems pretty clear. First, if length is an issue, spin most of the financial crisis discussion into a second book, perhaps on financial crises generally. (The VSI series already pulls that kind of trick in other cases: e.g., in addition to a 4th edition VSI on the European Union, there is now a separate volume on EU law.) Then, include many more diagrams to explain off-balance sheet vehicles, derivatives, and maybe payment systems, too. The copy-editing could also be tightened: currently a figure explaining balance sheets at the beginning and end of a financial period uses the same graphic and numbers for before and after, even though income was earned (Fig. 2, @ 35); and there is the occasional ambiguous phrase, e.g. when adverse selection is described as a problem arising “because the borrowers have better information about themselves than the lender” (@28). Finally, some reflections on the role of banks in society -- especially during an era of rising inequality -- would be helpful. The authors are plainly experts in their field. If they were to aim less at subscribers to the FT and more toward engaging readers who are new to the subject, this book could become very useful indeed.