December 01, 2015
How The Other Half Banks As A Regulation Story
Posted by David Zaring

Mehrsa's fine book is an appealing combination of history and policy. On the one hand, the book reviews the way that the poor and middle-class have accessed the finance system in the United States over decades, and how that access has been a story of changing institutions. On the other, policy, hand, the book features an appealing recommendation, not for a return to the community banking days of yore, but rather for a supplementation of our current national banking system with a reanimated postal bank.  While community banks, for a variety of reasons, handled the banking needs of the poor and middle class (or so she argues; I'm not entirely convinced about that), national banks are unwilling to chase small depositors, for profit lies only in servicing big ones.  A postal bank might at the very least be able to provide the unbanked with debit cards, and at best might be able to give them the sorts of financial services that are now being provided by shadow banks such as payday lenders, title loan companies, and the like.

I could see assigning this book to the class of business school or law school students interested in how the banking system has changed and what it does today.

One of the things it does, and has always done, according to Mehrsa, is dependent on the government. On page 16, she posits that "government support is the only reason depositors trust banks, and without trust from depositors, banks don't exist."  One of the interesting memes that I have noticed in law and finance scholarship is that, in marked contrast to corporate law scholarship, many of the authors agree with Mehrsa that finance, by some measures the largest component of the economy, is almost entirely a creature of regulation. For other examples of this sort of work see here and here. As someone interested in regulation generally, I see why I've grown particularly interested in financial regulation, though I suspect that an important component of financial intermediation is not purely an example of regulatory beneficence.  Indeed, the whole regulatory arbitrage story that plagues financial oversight suggests that regulatory fixes to fundamental finance problems, like banking the unbanked, will always be challenging.

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