IHS Bank Involvement Study: Kemp Unconvinced
My frequent sparring partner, John Kemp of Reuters, reads the IHS study justifying the benefits of bank involvement in commodity markets, and is not convinced. I agree that the report is rather lame, but am not convinced by Kemp’s critique and the policy implications he draws. One of Kemp’s points is that banks are not essential to the purchase, sale, transportation, storage, or processing of commodities. Other entities, most notably commodity trading firms like Vitol or Glencore or Trafigura, can provide the same services as the banks.
This is true, but beside the point. There are few types of firms that are utterly essential, with no substitutes. Even banks are not irreplaceable in the functions that Kemp, and others, agree is appropriate for them. Their core function of providing credit can be performed by the capital markets. Or loan sharks.
The fact that banks can profit as a result of their activities in physical commodities should create a rebuttable presumption that they are providing economic value. In a reasonably competitive market, where costs and benefits are internalized, firms that survive do so because they can provide a good or service of equal or better quality at equal or lower cost to other potential suppliers. Indeed, in these circumstances, all active sellers have marginal costs that are approximately equal — cost functions determine the relative outputs of the active suppliers. Driving out suppliers who can profitably service part of the market will drive up prices, reduce output, and reduce welfare: some of the output supplied by the eliminated firms will go unproduced, and the rest produced at higher cost.