Essential risk-taking can put banks out of the banking business

August 8, 2022
by Noriyuki Morimoto

An enterprise is an entity that identifies its purpose and methods to take conscious and intentional risks in its business. The execution of this intrinsic risk-taking entails a variety of non-intrinsic risks, and risk management refers to the proper control of those risks.

In any business, intrinsic risk-taking is self-evident. It is unnecessary to ask what it is, and no one asks what it is. For banks, however, the subject of intrinsic risk-taking is not the least bit obvious.

For example, if the social function of industrial finance, which is to provide loans, is considered to be an intrinsic risk-taking activity, then the risk associated with accepting deposits, which is the means of procuring funds, should be considered incidental and appropriately controlled relative to the risk associated with issuing bonds and securitization of assets and other market procurement methods.

However, under current bank regulations, the position of a deposit-taking financial institution is so restricted that it can be an obstacle to the enhancement of the essential risk-taking of industrial finance, i.e., the risks associated with it can be beyond the scope of control. Therefore, the ultimate management action could be to give up the title of a bank and specialize in market procurement as a non-bank institution, or to directly solicit funds from investors as an asset management business.

Conversely, if the retail financial service of accepting deposits is positioned as an intrinsic risk-taking activity, the loan business will be positioned relative to various other asset management options, and its risk will be absorbed as an incidental risk in the overall risk management of the asset management business.

When this is the case, as deposit service is just a small part of retail finance, the formation of a comprehensive service portfolio that includes investment trusts, insurance, consumer loans, and mortgages will become the essential risk-taking approach. This is why we cannot deny the possibility that thorough execution in this direction will ultimately lead to a departure from the banking business.


[Category /Risk Appetite Framework]

Noriyuki Morimoto
Noriyuki Morimoto

Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.