Renewing Glass-Steagall or continuing to look for ways to separate banking and commerce even more “will not make the system any safer because mixing the two did not weaken the system in the first place,” in the words of former Comptroller of the Currency Keith Noreika. Speaking at the Clearing House Annual Conference in New York City Nov. 8, Noreika also suggested mixing banking and commerce can be helpful to banks in smaller communities. Noreika invoked former President Bill Clinton, saying he acknowledged that, “Th ere’s not a single, solitary example that [ending Glass-Steagall] had anything to do with the financial crash. In fact, a study done afterward said that the unified banks were actually slightly less likely to fail than either the commercial banks that overloaded on subprime mortgages, or the investment banks, like Bear Stearns, Lehman Brothers and others.” Former Federal Reserve Vice Chairman Alan Blinder posed the question another way, Noreika noted: “What disasters would have been averted if Glass-Steagall was still on the books?” Would that have prevented poor work by ratings agencies, Noreika asked, plus weak mortgage underwriting or the bundling of mortgage-backed securities in ways that hid the underlying risk? Advocates for keeping banking and commerce separate also point to size as a source of inherent risk and suggest current laws have allowed companies to become too big, Noreika pointed out. “As the argument goes, further mixing of banking and commerce would allow companies to get even bigger, at the expense of smaller community banks,” he said. “Economists like Joseph Stiglitz point out that the biggest banks went from controlling 15 percent of banking assets before Gramm-Leach-Bliley to controlling 65 percent by 2008. So, of course, that must be the cause of the crisis.” Critics point out that the law allowed mega mergers like JP-Morgan and Chase Manhattan in 2000, Noreika acknowledged, but it also allowed Bank of America to help contain the economic meltdown by buying Countrywide and Merrill Lynch. “Deals like those would not have been possible before 1999,” he argued. The danger is not the size of the banks, it’s the concentration, in Noreika’s view. “Th e solution to concentration is not further isolation and protectionism, but diversity and healthy competition,” he said. “Laws that prevent companies with resources and means from becoming competitor banks only serve to protect existing big banks from would-be rivals. It has the perverse effect of maintaining the concentration in the big banks that exists today.” In smaller communities, Noreika argued, fewer restrictions against mixing banking and commerce could allow for greater use of local capital and support growth and business activity locally. “It could help smaller community banks grow and take advantage of benefits previously only available to grandfathered companies and banks that are big and sophisticated enough to convince the Federal Reserve to grant them an exception,” he said. Meaningful competition could have a number of other positive effects besides tempering the risk concentrated in having just a few mega banks, Norika suggested to members of Th e Clearing House. “It could make more U.S. banks globally competitive and promote economic opportunity and growth domestically,” he said. “For banking customers, particularly those underserved by traditional banks, more competition could result in better banking services, greater availability and better pricing. If a commercial company can deliver banking services better than existing banks, we hurt consumers by making it hard for them to do so.” A number of empirical studies support that argument, according to Noreika. One such study, introduced at the Federal Reserve Bank of Chicago’s Conference on Bank Structure and Competition in 2007, examined the effects of combining banks with companies from other commercial sectors by looking at returns and risk. “The results suggest that the combined companies can achieve increased returns with minimum risk when combining banks with companies in either the construction, retail or wholesale sectors,” Noreika said. “The study also shows, both the banking and commerce sectors benefit from commingling. In an accompanying paper, the authors observe that society could benefit from more mixing of banking and commerce in the form of economies of scale and scope, increased internal capital markets and diversification. At the same time, they see the rise of monopolistic conglomerates unlikely and note that other laws exist to mitigate that risk.” Another study introduced at that same conference looked at effects of mixing banking and commerce on the pricing of loans, Noreika noted. In 2009, the authors published findings that showed that as banking and commerce mix, customers benefit from improved pricing, up to a point, according to Noreika. They cautioned, however, that when banking was overly concentrated and competition disappeared so did the benefit to customers. “The takeaway from these studies is that mixing banking and commerce can generate efficiencies that deliver more value to customers and can improve bank and commercial company performance with little additional risk,” said Noreika. “Still, regulators should watch markets closely to avoid too much concentration and not enough competition. As prudential supervisors, regulators also would need to match any increased complexity in the institutions they oversee with added sophistication and capabilities.” In closing his remarks for the Clearing House audience, Noreika observed that In reviewing the available literature, there appears to have been a rich dialogue leading up to the crisis about the benefits and risks of allowing banking and commerce to mix more freely. It was a healthy policy discussion, in his view, and seemed to be inspiring significant research into the subject. “Unfortunately, the crisis has been used as an excuse to silence that discussion,” Noreika said, “even though the evidence and data show that combining banking and commerce had little to do with the cause of the crisis and the Great Recession that followed. We need to restart that dialogue. We need fresh research that looks at banking and commerce in a post-Dodd-Frank world. In having that conversation, we might find opportunities to do things a little differently, and we might start a powerful and beneficial economic engine.” Noreika’s stance on mixing banking and commerce drew a sharp rebuke from Independent Community Bankers of America President and CEO Camden R. Fine. “ICBA and the nation’s community banks continue to strongly support the longstanding U.S. policy maintaining the separation of banking and commerce,” Fine’s statement said. “Prohibiting affiliations or combinations between banks and non-financial commercial firms has served our nation well by limiting systemic risk and restricting commercial access to the federal safety net. Allowing corporate conglomerates to own banks would jeopardize the impartial allocation of credit, create conflicts of interest and privacy concerns, dangerously concentrate commercial and economic power, and unwisely extend the federal safety net to commercial interests. “To preserve this longstanding policy, ICBA continues urging policymakers to close the industrial loan corporation loophole, which allows commercial interests to own banks while avoiding the legal restrictions and regulatory supervision that apply to other bank holding companies,” the statement continued. “This charter allows ILCs and their parent companies to avoid Bank Holding Company Act regulations and consolidated supervision, threatens the financial system, and creates an uneven playing field between community banks and other lenders. To address this problem, ICBA continues urging the FDIC to impose an immediate two-year moratorium on ILC depositinsurance applications and Congress to close the ILC loophole for good. “The benefits of mixing banking and commerce continue to be a grand illusion,” said Fine. “Mixing banking and commerce wasn’t a good idea in 1929, 1999, 2006 and 2009 — and it’s still not a good idea today.”
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