Historically the role of the banks was essentially to transmit the impulses of the central banking system. In that transmitting capacity, banks ran the risk of insolvency if and when the central bank decided to "tighten" money supply either through higher reserve requirements or higher interest rates or tightened lending standards. A conservative bank culture typically allowed the bank to survive a periodic tightening and expand during other periods. At the end of the day, it was a good job with a franchise on the money creation powers of an expanding economy. A good bank culture allowed a profitable ride on a rising economy with little loss of market share.
However, as the bond market revved up with the support of credit rating agencies such as Moody's and Standard and Poor's, the banks began the journey towards being disintermediated. Market share was diminished in the form of moving from the net interest spreads on large loans to investment banking fees to underwrite bonds. Gradually the outlines of a "bypass" of the middleman of banks occurred in the largest segments. This large debt market bypass was completed as the Federal Reserve, under the demands of the Covid-related lockdowns, purchased these bonds.
At the same time, banks have increasingly standardized their loans to conform to be packaged into securitizations. This role, like that of the investment banking one above, does not necessarily require the powers to create currency to handle. Witness the proliferation of mortgage brokers. Again, as the Federal Reserve purchases these assets, the critical link of the bank becomes less critical. It appears to me that banks are increasingly losing market share in their primary function while the Fed's visibility and active role increases.
The long term implications are such that banks need to reposition themselves. First Republic Bank is a particularly attractive model - driven by a financial planning know your customer lead and followed by lending and asset management. However, the lower end of the market is wide open and most critically to be determined by payment systems and technology. For this reason, payment processing companies have developed market capitalizations that dwarf those of banks.
