Banks, who needs them?
A quick question and a quick answer:
a thriving, prospering banking system is essential for a thriving,
prospering modern economy. Banks bring
together the resources of savers and the needs of borrowers, particularly
borrowers who seek funds to establish or expand businesses or families and
individuals who use occasional borrowing to smooth out their income (good
banking principles penalize people who would borrow in order to live beyond
their means, but more on that at another time).
Banks also created and maintain the payments system, the
means by which money is transferred quickly and accurately throughout the
nation and even internationally. Bank
services include as well a variety of wealth management tools by which individuals,
families, businesses, and governments can store, grow, and make best use of
their financial wealth.
Without banks, almost none of these services would be
available.
Many non-banks provide bank-like services, but they all come to find the
need to rest their own services at some point on a bank.
Banking in the United States has grown with the
nation, from very simple institutions in the eighteenth and early nineteenth
centuries, to a wide variety of bank types, charters, and business models, as diverse
as the financial demands of the customers of the largest and most diverse
economy in the world. I once presented at a meeting in Chicago a
list of about two-dozen different types of banks in the United States . We have national banks, state chartered
banks, small community banks, larger regional banks, and very large banks with
extensive national and international business products and services. All of these operate and compete together,
with a body of customers behind each one who think that their bank offers the
best available choice of services that they want. No other nation in the world has a banking industry like ours.
The recent recession and financial panic—and the
inevitable politicizing of finance that came in its wake—have thrown much into
confusion and imposed upon sound and prudent bank supervision harmful ideas born of reckless
sloganeering and hubristic financial engineering. The complexity of banking—no more complex
than information technology, communications systems, or modern manufacturing—has
been superseded by even more complex bank regulation.
The rules governing banking are too much and too many to function reasonably. They have become more than the
very human people in the multitude of bank regulatory agencies can manage. The disciplining role of markets and the
valuable service of banker judgment have in large measure been replaced by
bureaucratic procedures and the judgments of government officials. These officials have had little if any
practical experience making loans, taking deposits and putting them to work,
building financial wealth, or otherwise providing products to customers. Government officials cannot run
businesses. Now, their government jobs
have become so demanding and complex, that they will not be able to do their own jobs, either. Too much has been placed
upon them.
Those most harmed by all of this are bank customers. For the moment, bank profits are up, but that
is because their losses are down as they recover from the recession, not
because services to customers are expanding.
As a result of government interest rate policies, depositors earn almost
nothing on the money that they place in banks.
The expanding oversight involvement of bank regulators makes it
dangerous for banks to offer new services to customers; the risk of breaking
any of thousands of pages of regulations has become too great. It takes almost half an hour to open a new
bank account, something that used to take minutes. Fewer credit-worthy borrowers today qualify for mortgages than
just a year ago, before new regulations went into effect. The number of banks has been declining in
recent years, dropping at the rate of nearly one for every business day, week
in and week out. Only one new bank has
been opened since 2010. We have fewer
banks today than the nation had in 1893.
A stagnant industry is less able to evolve to meet changing customer needs
and preferences.
For the good of all of us who rely upon banking services,
and for the sanity of financial regulators, we need to return to the principles
of good banking. We need to restore a system of supervision that is measured, not by how much banker
judgment it takes over, but by how it adds value to the ability of banks to
serve customers. Government agencies—and
the laws that they administer—that are derived from a founding document that
begins with the words, “We the People,” should do nothing less, and nothing more.
On another day I would like to share some thoughts about
how banks are being goaded to become their own enemies.
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