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The Banking Game: Analysis of the Extinction of the Bank as Trusted Institution by Doreen Soutar

The Banking Game: Analysis of the extinction of the bank as trusted institution and NONIIs as an indicator of non-reciprocal strategies by Doreen Soutar


The crisis in the financial markets in 2007 has drawn much attention to the way banks operate, and in particular the interaction between the trading and retail divisions. Here an evolutionary model is used as a basis to examine bank behaviour towards their customers, suggesting that banks are utilising competitive strategies in an essentially cooperative environment. The example of non-interest bearing profit-making activities is used to demonstrate this strategy, and it is suggested that current bank size and attitude towards customers threatens to render large banks with extinction.



The financial crisis of 2007 brought global banking strategy into stark relief. A combination of previous liberalisation of banking regulations, monetary policy and corporate banking strategies and operational policies (Taylor, 1999; Greenspan, 1998, Noy, 2004; Haldane, 2009) led to the collapse of a financial ‘bubble’. This is not the first banking crisis of this nature (Leyshon & Thrift, 2002; Wood, undated), and it is unlikely to be the last (Nabudere, 2009), particularly if the banking system itself refuses to accept a level of responsibility for the series of events (Stiglitz, 2009).

The assertion that the banking system – and in particular the trading division of banking operations – is non-linear, complex, highly interconnected and volatile (Johnston et al 2003) is a concept which is accepted and understood. However, this complexity need not deter attempts to unravel the circumstances which led to the crash, and any resultant alterations in regulation and practice in banking.

However, the consequence of the financial crisis in the form of a large investment in the banks by the taxpayer (The Independent, 2009) has substantially reduced the capacity of the banking community to assert that their strategy was effective or successful (Kennedy 2010). Claims of ‘bank bashing’ (Steiglitz, 2009) have tended to infuriate an already distanced and frustrated customer base (Kennedy, 2010).

In the current study, we look at some of the aspects of the banking community and how it operates, and attempt to do so in a way which may lead to some understanding of the banking position (e.g. Nowak & Sigmund, 2000).


Taxonomy of Banking

There is a duality of declared purposes present in banking as a whole which seems irreconcilable: a profit-maximising organisation which benefits from giving money away. Whereas the trading division of banking is assumed to be highly competitive, the retail division present themselves as being quasi-philanthropic. This is demonstrated in a quote from Bob Diamond, the Chief Executive of Barclays’ Bank in their 2010 annual report (Citizenship section):

“Our role is to help improve the lives of our customers. We must provide mortgages, allow businesses to invest and create jobs, protect savings, pay tax, be a good neighbour in the community while also generating positive economic returns for our investors” (p26).

This duality of strategy is one which suggests immersion not only in a competitive environment, but also in a mutually altruistic position within a community.


Banking Evolution

The concepts of competition and altruism – and indeed the interaction between these two concepts – are foundational to paradigms such as evolution (Boyd & Richerson 1992). Indeed, both economic and evolutionary analysts share theoretical instruments such as game theory to demonstrate their models. Given this prior synthesis, evolutionary theory is employed in the current study to demonstrate the divisions of the banking industry, and to suggest that the strategies which banks have employed in recent years have become increasingly incongruous to their business environments.

We begin by looking at the way banks create profit in a very broad sense, differentiating between retail and trading divisions of banks, and taking an overview of the everyday processes which govern their behaviour.

It is noted that there is wide agreement in the debate subsequent to the 2007 crisis that these two divisions of the bank have become overly intertwined (e.g. King 2010), and we discuss why this might be the case. In addition to examining the observed behaviour of banking strategy, an effort is made to attempt to understand the underlying motivators for it, including evolutionary theoretical standpoints and management theory (Nowak & Sigmund, 2000, Sveiby, 1989). The position of the banking community in a wider globalised economy is also discussed, both in terms of the way banks structure their customer-facing operations and their international corporate positioning (e.g. Kim 2007).

Fred the Shred

There then follows a discussion on the instruments of profit banks employ in the retail sector, differentiating between interest-bearing activities – NIIs – (such as loans and mortgages) and non-interest activities – NONIIs (such as fees and charges). It isnoted that there has been a great deal of comment in the press (FT, 2009) to suggest that the ratio between the interest cost of borrowing to the consumer (and small to medium sized businesses (SMEs) has risen sharply since the 2007 financial crisis.

Banks tend to advertise their loan services primarily on their rate of interest, as this is the primary competency of large banks in comparison to smaller ones (Akhigbe & McNulty, 2005). In contrast, arrangement fees on loans tend not to be advertised. Indeed, it is noted that obtaining the sum total of arrangement fees proves to be a very difficult task. This difficulty leads us to the purpose of the current research project.



The aim of the project was to try to gain a body of data from bank customers as to the current cost of loans in terms of arrangement fees. With this in mind, a survey instrument was created and placed online, asking anyone who visited the site to contribute to the survey by giving some very basic information about the size of their loan, the arrangement fees they had to pay, and how satisfied they were with this package. Forty four people responded, and the results from their responses is reported below.

In addition to this primary research endeavour, the results from Barclays’ Bank were collated from their annual statements, where the overall income from interest-bearing and non-interest-bearing instruments was reported separately. These figures were then analysed to assess the relative profitability of these two income streams, and compared to each other and to the overall level of profitability. From this, it could be established whether the claim that bank fees had risen could be demonstrated. We discovered that there was indeed an increase in the income obtained by non-interest-bearing fees in comparison to interest rates. However, by looking at the level of base rate of the Bank of England in comparison to the retail rate of interest, it was established that this shift in ratios was not due to a reduction in income from interest on loans.

One specific result stood out: the percentage ratio of arrangement fees to loans was higher when the loan was smaller. Thus, the larger the loan, the smaller the percentage of the fee which was applied to it. At various points in this study, evolutionary principles have been applied, and this result in particular seems to demonstrate the abject lack of co-operation or altruism, benefiting those customers who can borrow most, and penalising the prudent or financially weaker customer.

Monopoly banker

Interestingly, it was discovered that the comments respondents made about their banks did not correlate with the levels of arrangement fees they were charged, and this led to the conclusion that although arrangement fees in general were a source of annoyance, respondents were commenting on a much wider state of discontent between the banking system and the consumer. It was concluded from this that although banking practice may be narrated as complex and difficult to comprehend, the consumer understands very well that banks continue to attempt to maximise the profit they can gain from customers.

Although banks may view themselves as successful in a corporate sense, their customers continue to perceive them as avaricious and untrustworthy. This community of discontent is assessed in terms of fitness for survival of the bank, and it is suggested that this customer antipathy comes from an assumption of trust and fairness implicit in their dealings with the bank, and that this trust has been eroding over several years.


The Banking Game

The position of the bank and the consumer is discussed in terms of game theory, where there are options on both of two players to cooperate or defect (Nowak & Sigmund 2000). In effect, it is suggested that the consumer has cooperated with the bank to provide assistance when they were in need (Berger, 2010). In contrast, the banks appear to have continued to defect from a mutual altruistic position whereby the customer/taxpayer benefits from this altruism in return. Nowak & Sigmund (2000) note that the position of a co-operator who is defected on is known as the “sucker” position, and this seems to be the consumer mood (Kennedy 2010).

Thus, there is no evidence from the current project that banks have demonstrated any mutual altruism or cooperation with their customers. Indeed, the evidence might suggest that the banks have attempted to take advantage of their position as a necessary service to profit further from their customers, perpetuating a one-sided game.

The current project has no recommendations to make as to how to alter this position, however, it is noted in evolutionary game-playing that a community of defectors will eventually be infiltrated by co-operators, who tend to thrive at the defectors’ expense. The presence in the banking system of even a small level of mutually altruistic banks may encourage a paradigm shift away from the current system. In this case, the current large and powerful banks may find themselves as corporate dinosaurs: too large to survive an environmental shift.



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