Banks lose out to capital markets when it comes to credit provision

IN RENAISSANCE ITALY the first modern bankers realised that they could get away with keeping only some of the gold that was deposited with them on hand, and lending out the rest. In most countries banks have dominated lending to households and firms ever since. America has long been different, though. Yes, banks have played a big role in economic development: John Pierpont Morgan was the muscle behind the railways rolled out from coast to coast during the 1880s and a century later Citibank was helping America Inc expand abroad as globalisation took off. But capital markets have played a mighty role, too. Today that is truer than ever, which in turn helps explain the stunning scope of the Federal Reserve’s response to the latest economic crisis.