Running Right Back to the Bank

At least within the banking system, we've come up with mechanisms for dealing with these problems. More regulations and regulators restrain the bad lending once it gets started. And a central bank and deposit insurance help prevent bank runs. Most importantly, bankers are better able to distinguish the good loans from the bad -- and to renegotiate the terms of the bad ones when problems arise.

In addition to these structural differences, however, there are important cultural differences between a banking system and the securities markets.

Say what you will about stodgy bankers, theirs is basically a lending culture that is aimed at generating loyal customers, earning a decent spread and making sure loans are repaid. It is a competitively cozy culture that places a higher premium on avoiding mistakes than making a big score.

By contrast, the securities markets are dominated by a trading culture that is fiercely competitive and focused on quick transactions rather than long-term relationships. It is about probabilities more than certainties, driven more by fees than by spreads. Fundamentally, the goal isn't to make good loans or avoid making bad loans but to make as many loans as possible -- and sell them off before anyone is the wiser.

Obviously, we're not going back to a world where banks play the dominant role in finance. Even the banks themselves have been seduced by the trading culture and the higher profits they can earn as gatekeepers to the credit markets.

At the same time, old-fashioned banking may not be the dinosaur of finance. As the current credit crisis plays itself out, savers and borrowers may come to appreciate the safety and reliability of a well-regulated, well-capitalized banking system.

As Richard Fairbank has figured out at Capital One, the winners may turn out to be those intermediaries who figure out how to combine the efficiency and creativity of securities markets with the judgment and steadfastness of a bank.

Steven Pearlstein will host a web discussion today at 11 a.m. athttp://washingtonpost.com. He can be reached atpearlsteins@washpost.com.