We Need More Banks and New Kinds of Banks

In these pages we've read choral lamentations over the declining number of banks.  There has also been praise (for instance, from the American Bankers Association) for the diversity of banks. 

Let's get more banks as well as more diverse banks by providing additional charter alternatives.  Most of the existing ones (savings and loans, credit unions) are becoming irrelevant antiques.

Ben Bernanke and Timothy Geithner made a jackrabbit, skidding start when they instantly transformed securities firms into bank holding companies during the crisis.  Presto—more banks. 

Don't wait for the next crisis. Encourage more nonbanks to become banks soon.  This will reduce systemic risk, protect consumers and assure fairer and more consistent federal regulation of financial services.  It will also provide a wake-up call to the banking system: compete on equal terms or die.

Two groups of financial companies should soon become limited-charter banks: money funds and nondepository consumer lenders.

The SEC's Mary Schapiro and Bernanke want to make money funds become less like banks—even if it kills them.  That's dumb. 

A money fund is a prototype for the ring-fenced deposit bank that the U.K. Vickers Report advocated and the British government mandated.

Incredible, isn't it?  Money funds pay interest on liquid deposits.  Yet somehow they don't need to trade in credit default swaps, make  and sell wacky mortgages, or cheat customers by debiting withdrawals backward.  Money funds were also decades ahead in having no branches. 

When money funds become banks, banks might finally stop whining and profit from their example.

Just two missing pieces to add: deposit insurance and the ability to borrow from the Fed for liquidity, both of which come with the charter.  These new limited-charter banks should pay less for deposit insurance, with required risk-based capital of zero.  They'll be much safer, even with a bit more asset flexibility.

I won't hold my breath waiting for Bernanke to accord money funds what he gave Goldman Sachs and Morgan Stanley.  (The money funds don't have comparable clout—aka "systemic importance.")  Congress should legislate this new charter.  And furthermore take a very hard look at prohibiting uninsured bank deposits, with their potential for runs and systemic instability, as at IndyMac and Washington Mutual.  Bring money funds in and the big money can go to ring-fenced, insured deposits or into nonbank investments overtly subject to risk and fluctuating in value.

Having already created funny bank charters, let the Fed issue the special, limited charters for ring-fenced deposit banks.

A second set of financial firms many of which should become banks are the multistate nondepository consumer lenders, such as nonbank mortgage originators, payday lenders and remnants of the consumer finance industry.

Why are these lenders subject, for example, to state usury laws and fee limitations, when banks (even community banks with state charters) aren't?  What does accepting deposits have to do with the preemption?

Believe it or not, there was a time when banks such as JPMorgan Chase and Citigroup had to charge different rates on credit cards to people in different states.  I was the first to show how to stop that nonsense (on behalf of an ancestor of CitiFinancial). 

If that was a bad thing for me to do, tell me. Otherwise, stop states from proliferating inefficiency, unfairness and crazy quilt regulation of consumer lending. One reason consumer finance companies couldn't compete and have been disappearing is they needed dozens of lawyers and programmers just to stay tuned to changing limitations and restrictions irrelevantly imposed by states.

Debaters over Glass-Steagall point out that nonbanks, particularly mortgage lenders, created immense systemic risk. Non bank consumer lending is systemically important and merits consistent prudential regulation to assure fairness to consumers and mitigate systemic risk. 

In some of the most incoherent Congressional testimony I ever heard of, the Office of the Comptroller of the Currency recently argued against a bill that called for it to issue limited-purpose bank charters.  The basic idea was that these lenders and their products are all just too stinky for the high-toned OCC to even imagine getting near them. Let this cup be taken from them, then.

The Consumer Financial Protection Bureau is already supposed to write rules for the lenders, and directly supervise some. So, the CFPB could be the chartering authority for non-deposit-taking banks. 

Let's have more banks, consistently regulated under a comprehensive scheme. Let's have new banks, which have figured out how to do what existing banks haven't wanted or been able to do. They will make our system more coherent, more resilient, more diverse, and fairer to customers—without having any powers beyond those accorded by existing charters.   

Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.