May 20, 2009
The Future of Banking
Posted by Gordon Smith

Bank of America completed a $13.5 billion common stock offering yesterday and is now almost two-thirds of the way toward raising the $33.9 billion goal established through the recent stress tests. Concern over banking's present is fading rather quickly -- perhaps too quickly, given the W$J's report yesterday about small and midsize banks and projected losses from commercial real estate.  But attention is turning to the future. The Obama Administration is close to announcing a new federal agency to regulate consumer financial products, like mortgages and mutual funds:

Under the patchwork of regulation that presently exists, oversight of financial products is now split between a myriad of state and federal agencies, including the Fed, the Securities and Exchange Commission, the Federal Trade Commission, and others.

One possible scenario is that officials consolidate some government agencies, such as the Office of Thrift Supervision, and strip some powers from the Federal Reserve and others to centralize the policing of financial products within a new body. The Fed has been widely criticized for failing to use its powers to regulate mortgages during the housing boom.

I was somewhat surprised that credit cards are not in this mix, but for reasons not clear to me, the credit card legislation that is almost through Congress is placing that area outside the new agency. Insurance? Still not clear. David will have a better idea about whether all of this reshuffling makes sense, but I am interested in another possibility: the integration of banking and commerce.

As I have observed recent problems in banking, I have wondered why banking must be separated from commerce. Would Wal-Mart Bank be more or less stable than Bank of America standing alone? When you consider the fact that we have had two major banking crises in the past 20 years, you have to wonder about big structural questions like these. For a thought-provoking take on this issue, read Mehrsa Baradaran's recently posted paper, Banking Like it's 1929: The ILC and the Reconstruction of U.S. Banking. Mehrsa uses Industrial Loan Companies ("the only institutions where commercial firms are permitted to own banks") as a springboard for discussing the separation of banking and commerce. The provocative takeaway: "integration of commerce and banking would lead to a more stable and diversified financial system."

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