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In the back of my mind, I keep hearing the strains of the song from the film Cabaret: “Money makes the world go around, the world go around . . .“ Indeed, money is the driving force behind the global economy. My goal here is to focus on the extent to which the regulatory environment affects how banks make the money go around.

That is what banks are supposed to do, is it not? Interestingly, at the more abstract levels of finance theory it is difficult to justify the existence of financial intermediaries because if everyone had perfect information (and the existence of perfect information is a typical assumption in theoretic formulations), there would be no reason to pay banks to act as middlemen for channeling financial capital to productive investment projects. Individuals would just do it directly for themselves.

In the real world, though, what banks are presumably selling to depositors is their expertise in evaluating investment opportunities. For that, bankers take a cut of the return from their loan portfolios and pass on some lesser rate of return to the depositors.