Why America Needs to Reinvent Banking, Not Add Banking Regulation

With the passage yesterday of the five-year anniversary of Lehman Brothers’s failure on Sept. 15, 2008, invariably pundits have asked whether banking is better off today. That might be the wrong question, however.

While the banking industry overall is in better shape today than it was at the height of the credit crisis, the intervening years have been particularly good for the nation’s four largest banks: Bank of America Corp., Citigroup, Wells Fargo & Co. and JPMorgan Chase & Co. These banks today own more of the banking market than ever before, and that has unsettling implications for the U.S. economy.

Just how much of the banking industry do these banks control? Try nearly 37% of all deposits, or around $3.3 trillion worth, according to SNL Securities. Back in 2007, before the crisis took full bloom, the Big Four controlled around 26% of deposits, or about $1.8 trillion. If anything, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo are only more systemically entrenched today.

The White House has made it plain that it wants to shore up the banking system and ameliorate “too big to fail,” the threat to the overall economy posed mainly by these four banks should they tank. This effort has largely centered on finalizing regulations stipulated by the Dodd-Frank Act and by shoring up regulatory enforcement. After an Aug. 19 meeting between President Barack Obama and the cabal of banking regulators, a White House spokesman told The New York Times that the president wanted to convey “the sense of urgency that he feels about getting these regulations under Wall Street reform implemented.”

Simply put, he’s conveying the wrong message.

The single best antidote to “too big to fail” and to a recalcitrant banking industry — other than breaking up the Big Four — is competition and innovation. Neither is even on the White House agenda for the banking industry, let alone has the administration taken a single meaningful action to promote them.

We are now entering the third consecutive year of essentially zero new banking charters granted by the federal government. And don’t think there is no demand for banking charters, because there is — lots of it. However, because of this freeze on new charters, the prices for existing charters have escalated wildly. Even those charters for existing banks that are still laden by questionable assets as a result of easy lending in the years leading up to the credit crisis cost well more than what the average banking investor would consider a good price.

DEPOSIT PERCENTAGE SHARE FOR 4 LARGEST BANKS

Without bank charters, banking competition cannot fully foment. Existing banks, no matter how peripatetic their performance or management, can continue simply because the competitive dynamic has been warped by the licensing freeze. Certainly, this competitive dynamic benefits the too-big-to-fail banks, as well.

Regulators will argue that now is not the time for new charters because banks are still failing or because they are still working on putting Dodd-Frank into action. Yes, the banking industry needs Dodd-Frank resolved, to some degree to end the uncertainty (although the banking lobby continues to stick to its delay strategy). But new banks will add vibrancy to banking, and that’s what will foment more long-term good than any Dodd-Frank provision. Further, regulators should want newly chartered banks that don’t have the legacy assets and habits of existing banks. No one wants to squander deposit insurance, but the point of deposit insurance is not to eliminate the risk of bank failures, only to mitigate them.

The other criteria for a healthy banking industry is innovation. When we talk of innovation in banking we talk about the opportunity to explore new products and services and to allow startup ventures to spark. Indeed, the number of banking-related startups that have been launched over the last three years is staggering. Venture capitalists smell profits in payments and mobile banking services, to name two segments of startup concentration, and they are investing mightily. In many ways, they are doing so in spite of the federal government, not because of it. The limitations on banking charters means that many banking startups must “borrow” a bank charter to provide meaningful services to consumers. Banks themselves, meanwhile, face a regulatory body that is at best benign to product development, and at worst hostile to it. To say this is counterproductive is to understate the obvious. There is much product development that can take place without endangering a bank’s core capital or the government’s deposit insurance.

Rather than focus single-mindedly on Dodd-Frank implementation and getting some watered-down version of the Volcker Rule in place so that President Obama can look his friend Paul Volcker in the eye, the White House should place equal weight on creating a more dynamic, competitive banking industry. Freeing up bank charters is a first step. Changing the stance of banking regulators to one that is more predisposed to innovation is another. Banking doesn’t have to be a disaster waiting to happen; it can be an industry of revolutionary ideas and ventures. In other words, let’s make banking too dynamic to fail.