Who's Bullish on Banks as Utilities? It's Not Who You Think

Certain policy terms can alarm bankers and industry experts. One that increasingly sparks disapproval, or at least polarizing commentary, these days is "utility."

The term, which seems to have different meanings to different people, entered discussions surrounding the regulatory response to the crisis. Higher capital requirements and other benchmarks, combined with lower risk appetites in portfolios, led some to compare banks post-crisis to public utilities: heavily regulated firms with fortress-like balance sheets that essentially serve a public function.

The word has drawn even more attention after Federal Reserve Bank of Minneapolis President Neel Kashkari floated the idea of making banks utilities to end "too big to fail" once and for all. But his February speech has also sparked a fresh rebuke of the concept.

In his annual shareholder letter, JPMorgan Chase Chief Executive Jamie Dimon said, "There is nothing about banking that remotely resembles a utility." Turning banks into utilities, he said, would encourage "irresponsible lending."

Former Fed Gov. Mark Olson also threw cold water on the utility idea in a BankThink post last month. He noted that supporters of the concept overlook certain complexities, such as the fact that utilities are granted monopoly status over certain product or service lines "in order to develop the infrastructure required to provide a needed public service."

But the idea of banks as utilities, or at least variations on the concept, have caught on with some people not as focused as Kashkari on breaking up the largest financial institutions. The cable financial news personality Jim Cramer wrote a blog earlier this month in which he highlighted the stock-market benefits of turning banks into utilities. Citing Dimon's letter, Cramer pointed to the sluggish growth in banks' stock prices compared to those of utilities.

"Banks could only wish they were utilities, which, by the way, are consistent, pay a good dividend, and have some growth characteristics that banks should be envious of," Cramer wrote on the Real Money blog. As an illustration, he compared the stock price movement of Bank of America with that of one of the biggest utilities. "Five years ago today, Bank of America was at $13. Today it is at $12.85. American Electric Power was at $36.50. Today it is at $65.60. You got about $10 in dividends from AEP in that period, while you got about $0.50 from Bank of America," he wrote.

True, Cramer noted that banks' growth difficulties have been spurred by the regulatory environment. But when he compared the two regulated industries – banking and utilities – "the regulators in utilities clearly are willing to give investors in their flock better returns than the bank regulators are," Cramer said.

"So, maybe banks serve vital functions, but as far as I am concerned, the function that we want them to do, give us growth and income, can be much better found in the utilities that Dimon doesn't want banks to be turned into," he said.

Others see new revenue opportunities for banks pursuing fee-for-service models. Writing on BankThink, industry consultant Jim Van Dyke said banks should be charging higher fees in advance for providing functions for which consumers are willing to pay, rather than charging punitive "relationship-killing" fees after the fact such as for overdraft protection. He pointed to the success of online retailers and subscription services such as Netflix and Spotify.

"Sure, I've heard bankers frequently say they don't want to become 'utilities' or 'just pipes.' Yet this misses the point that consumers want to feel empowered by paying for something that they deem to be essential to their lives," Van Dyke wrote. "They are willing to pay to be pleasantly surprised by a service that proves to be essential and practical. Most important, they want to have convenient and safe solutions for some of life's most complex challenges. Financial services are a paramount need for everyone, and consumers need what bankers are in a unique position to offer."

It's not clear how far the banks-as-a-utility idea will go, but don't expect the word – supported by some, opposed by others – to go away anytime soon.

Joe Adler is the editor of BankThink. Any views expressed are his own.