Quora Answer: Do You Think Banks Would Make More Money If They Catered to Customers as Much as They Cater to Shareholders?

The following is my answer to a Quora question: “Do you think banks would make more money if they catered to their customers as much as they cater to their shareholders?”

Banks do cater to their customers.  Banking is a competitive industry.  A bank that does not cater to the market will not gain market share.  A bank that underperforms relative to its peers will have less profitability.  This non-performance will give investors less confidence in it, and they will sell their shares.  This will cause the shares to drop, and this will affect the overall equity of the bank, which reduces its leverage.

If the bank continuously underperforms, it will start to make losses, and these losses will put downward pressure on its stock, causing the market to bet on a fall.  This will affect its equity further, reducing its leverage, causing the bank to recall loans and reduce its loan portfolio, further causing it to lose market share.

If this is not arrested, the bank will eventually be bought out, or fail outright.  Shareholders and investors are also customers.  Debtors are customers.  Other banks are customers.  Depositors are customers.  They are all inextricably linked.