Defining a Bank
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Banks are defined as rather simple entities – they take money in at one end and lend it out at the other. More specifically, as most of us once learned in school, individuals open accounts with a bank where they deposit funds for a variety if reasons – mostly safety related. Having your savings fully insured by the Federal Deposit Insurance Corporation (FDIC) is a lot better than digging a hole in the back yard or trying to hide it in a mattress.
The inducement for someone to start a bank is that they have the ability to take a portion of those deposits (some of it will be kept as a mandatory reserve) and then lend it to another customer of the bank – usually a local business. The difference between what the bank pays the depositor for the deposit they made and the interest rate they charge the borrower is the bank’s profit. Really pretty simple – or so it used to be.
The outline of what I just laid out is pretty much what people think of when they say the word “bank.” However, for the past 25 or so years no such bank has existed.
A bigger challenge is that the bank regulation system, the Federal Reserve, the individual state banking regulating authorities, the FDIC, the Office of Thrift Supervision, the Controller of the Currency, etc. were all established based on the original definition of a bank.
Citigroup, Bank of America, J P Morgan Chase, Wells Fargo and the other “national” banks no longer survive on the simple spread between deposit and loan rates.
In today’s financial Wild West, anything that has a dollar sign attached to it anywhere in the world is fair game for today’s banks and they pursue it more aggressively than did Captain Ahab in going after the White Whale: all caution is thrown to the wind. The outcome of Ahab’s pursuit was not a good one in the end and the world’s banking system isn’t going too well at the moment either.
As the proposals come forward for re-establishing banking regulations that were discarded over the past 25 years there is one simple flaw: banks are no longer banks. It is not possible to go back to where we were but we have nothing in place with which to go forward.
Having said that, there may be a case for splitting apart the retail and commercial banking systems. Retail systems are those that deal with the general public and small business (somewhat akin to what the banks were like outside of major cities) and commercial systems are those that primarily deal with the commercial aspects of the economy (corporations, international trade, foreign exchange, securities, and high net worth individuals).
The mega-banks of today would certainly resist such a move, as the reason they are in the retail business is that it is the cash cow of the banking business. Those cheap deposits the branches attract (Wells Fargo doesn’t have branches any more – they have stores, as an example of just how far away from the “banking” concept some financial companies have gone) are the fuel that feeds the trading and lending practices of the modern “bank.”
Another motivation for keeping the system together, from the bank’s perspective, is that if a company such as Bank of America didn’t have all those “retail” branches around the country and world and all the credit cards and auto loans and mortgages integrated into its banking structure, the government could let the retail bank fail, shut it down on a Friday, have the FDIC take it over, and re-open it on Monday under a new name and presumably a series of new owners as they have done 19 times this year with smaller banks. Given the nature of systems integration within the banking system and the lack of restrictions among a banks wide variety of non-“banking” subsidiaries, tearing them apart is surely a Solomonesque task.
Also, the concept of the “bank holding company” is also a misnomer in today’s financial world. Once upon a time, the bank holding company was just that: a central parent company that owned a series of independently operated but centrally controlled banks. The idea was for each state to preserve some semblance of its own banking system rather than have no major “home state” banks within its borders. However, here is where the regulatory system began to break down as the big city banks began to switch their charters to whichever regulator was easier or more favorably attuned to the banks business plan and the “state chartered” bank was the looser. Bank holding companies eventually became vehicles for holding non-bank subsidiaries.
If there is one thing that should be learned for all the financial system is going through it is that no rule should be permanent. One may argue that there are moral absolutes in this world but surely there are no business ethic ones. Codes of conduct put into place for the banking industry in one decade will not be relevant in the next decade. There are those that would still argue that government has no business in business even after seeing what occurs when the armed bank vault guards are replaced by the “rent-a-cops.”
Seeing where we now are, I would definitely be an advocate for reinventing a dual system of “people” banks and “commercial” banks. It wouldn’t really be going back to where we were but it might get us out of where we are.