Euro-zone banks' absurd business model

The starting point for the absurdity of banks' economic model is as follows: households in the euro zone have financial savings that are increasingly risk-free, while banks are carrying out financing of the economy that is increasingly risky as there is one crisis after another. At equilibrium, banks must therefore transform risk-free deposits into risky financing for the economy on a large scale . For banks to have risk-free liabilities and risky assets, the only solution is for them to have large capital to absorb possible losses on assets. This capital is, accordingly, obviously very risky and must provide a very high risk premium to its holders, i.e. the banks' shareholders. This model is absurd since: As banks need to have very large capital, and in addition very high costs (due to the very high risk premium), the cost of bank intermediation is very high, and bank intermediation is not competitive with market financing and also a hindrance to growth; Banks insure savers against the risk associated with financing the economy (risk of borrower default) since bank deposits are completely risk-free, without charging a sufficient insurance premium to the depositors, especially in an environment of very low interest rates. There is therefore a moral hazard, and too much savings are invested in bank deposits compared to what would be optimal. Since it is unlikely that depositors will ever pay insurance premiums to banks, the solution may lie in tax and regulatory incentives for direct ownership of risky assets by savers (households).