By Douglas J. Elliott – Banks took in deposits and put the money to work by lending it out and also by holding a substantial amount of fairly safe financial investments. These investments were held primarily because they provided more liquidity than loans, since they could be readily sold if needed, unlike loans.
There are reasons why trading and investment activities should be unusually profitable for banks on average. The infrastructure they use for proprietary investments is generally already in place due to the need to hold large investment portfolios and to serve customers, therefore the marginal cost of adding proprietary investment activity can be low. A great deal of information flows through the largest banks. Some of this must be held confidential and cannot be shared even within the firm, but much of it can legitimately be shared. The insight gained from these information flows adds up to a significant market advantage that should yield excess returns on average. http://bwbx.io/kSx2