What is a bank?

October 31, 2022
by Noriyuki Morimoto

The basis of the risk appetite framework consists of the full execution of intentional risk-taking that defines the fundamental nature of the business, and the strict management of various risks associated with such intentional risk-taking.

Now, what is intentional risk-taking in banking? If intentional risk-taking is considered to take place in the loan business, which is the social function of industrial finance, the risk associated with accepting deposits as a means of procuring funds would be deemed incidental: something that should be controlled appropriately in comparison with the risks associated with other market funding methods such as issuing bonds and asset liquidation.

Thorough risk-taking in this direction could, as one possibility, put the bank out of business. Under current banking regulations, the position of a deposit-taking financial institution is so restricted that it can be an obstacle to the advancement of risk-taking in industrial finance, i.e., the incidental risks associated with industrial financing may be beyond the scope of control. Therefore, the ultimate business decision could be to give up banking and focus on market procurement as a non-bank institution, or to directly solicit funds from investors as an investment management business.

Conversely, if the object of risk-taking is considered to be personal financial service, one part of which is the deposit business, the loan business would be juxtaposed with other activities like bond investments as one of the various options for proprietary investment, and the risk would be absorbed as an incidental risk in the overall risk management done in asset management.

In this case, since deposits are only a small part of personal financial services, a comprehensive service system of mutual funds, insurance, consumer loans, and mortgages will be established as a way of risk-taking, and the possibility cannot be denied that the thoroughness of this direction will ultimately result in de-banking.

In short, the intrinsic risk of traditional banking is becoming apparent.


[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.