As a follow up of our previous post on 3 Simple Banking Ratios, I wanted to share a deeper understanding of the Banking Industry and how can us value investors attempt valuing or making some sense of it. “Banks are too complicated. They are too huge. It’s not within my circle of competence.” These are some of the common responses with regards to investing in Banks. Indeed, Banks are complicated, however, they are complicated because of our actions.
History:
I believe that to understand the Banking Industry, one has to go back to the fundamentals of the banking system. The traditional banking system was to facilitate the process of making loans and funding them by issuing short-dated deposits. Essentially, this generation of revenue is termed as the 3-6-3 Rule. The 3-6-3 Rule was how the retail banks generated revenue in the United States the 1950s to 1980s. ...
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