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The growth in hedge funds, private equity firms and other entities outside the regular banking system is leading one global group to call for stricter oversight of non-bank entities.
November 19 -
Banking powers, specifically the power to accept demand deposits, should be limited by Congress to institutions qualifying for federal deposit insurance. Otherwise we face uncontrolled systemic risk from inconsistently regulated entities.
October 30 -
Receiving Wide Coverage ...There's a New Bobbie, Er, Mountie in Town: The surprise announcement that Mark Carney, Canada's central banker, will cross the pond to head the Bank of England could be viewed as a shot across the bow for global banks operating in the London regulatory haven. Granted, Carney is a Goldman Sachs alumnus (or "a member of the Government Sachs Club," as a Times headline put it). But he also has a history of ruffling bankers' feathers, and not just Jamie Dimon's. An economist tells the FT, "Carney is known to be fairly tough with commercial banks in Canada. His public comments suggest he is no great fan of 'light-touch' regulation. He also appears to have little time for arguments that higher bank capital buffers are preventing economies from growing." Beyond simple questions of tough or soft, the Journal notes that Carney "has been a vocal advocate of coordinating bank supervision between countries. That has not always been the philosophy among British regulators, who sometimes have embraced a go-it-alone strategy." Though he will again be playing the role of central banker, Carney's dealings with bankers will go well beyond monetary policy, since the BoE is set to take over much of the financial regulation done by the soon-to-be-scrapped Financial Services Authority. According to the FT's "Lombard" column, Carney "is credited with helping steer his country clear of the banking crisis. … And as chairman of the Financial Stability Board, the Canadian has an appreciation of the risks posed by shadow banking." That will surely come into play when he's policing the City, the shadowy home of the London Whale and AIG-FP. Is it churlish of us to note that Carney's wife, a British environmental activist, has called global financial institutions "rotten or inadequate" and expressed admiration for the Occupy movement, according to the Telegraph? The Economist goes as far as to speculate that before his five-year term at the BoE expires Carney might be lured back to this side of the Atlantic … to succeed Ben Bernanke at the Fed.
November 27 -
But the consulting firm says the sector remains an integral part of the U.S. financial system and cautions against overregulating it.
May 30
I am not easily astonished, but I have to confess astonishment at the nostalgic affection for
Even while professing deep fondness for commercial banks, particularly for community banks, shadow banks'impresarios have publicly offered numerous schemes for expanding shadow business at the expense of the commercial banking industry. Rising above the great variety of the plans is a unifying characteristic: All would deliver a mighty stimulus to the
The latest new idea is really an old idea (as are nearly all of these "new" ideas): To have another go at the 1990s experimental
Laying aside for now the daunting challenge of defining what is "traditional banking"—a challenge demonstrated by the eight years it took the SEC and the bank regulators to define traditional bank securities products—narrow banking means a narrow industry.
Where do all the things go that banks do profitably today that will not be blessed as being "traditional banking"? They will not disappear as long as these are products and services that customers will pay for. Shadow banking will happily take them.
Keep in mind that shadow banks are already doing as much banking as they can—hence their handy moniker. There is very little that a bank does today that does not face competition from nonbanks, except maybe paying for deposit insurance and supporting heavy regulatory supervision. There are plenty of nonbanks making loans, providing deposit-like products, and offering payment services, but for now they do have to compete with banks for their customers.
Under the narrow bank
Some narrow bank regimes would allow holding companies to offer—in affiliates walled off from the bank—what might not meet the "traditional banking" definition. Perhaps some banking firms would be able to afford capitalizing, establishing, and running more nonbank affiliates to do that and somehow work out the regulatory and business hurdles to offering combined services. With such affiliations, though, size matters, and many banks may find that ability a strain.
The proffered favors to shadow banking are particularly puzzling, considering that the recent financial recession had its prime locus among shadow banking firms, which proved to have feeble defenses against the winds of adversity. Remember the fallen: Bear Stearns, Lehman Brothers, AIG, Fannie Mae, Freddie Mac, and Merrill Lynch, along with thousands of lesser-known nonbank financial businesses.
This is not to ignore that there were commercial banks (large and small) that eventually failed or got into financial trouble, too, some in part in their efforts to pick up the pieces of the failing nonbanks. The point is that the shadow banking firms were more vulnerable and less resilient than the commercial banking industry, even with all of its problems. And yet, like moths attracted to the flame, some policymakers and
I feel it important to mention that these proposals do not give much attention to customers. They should. Narrow banks also mean narrow services. That means narrower customer choice. Today, when a customer wants financial services of whatever nature he can pretty much go to a bank and the bank can figure out how to meet those needs. In a narrow bank world, customers would be forced to wonder, "Just what can the bank do or not do for me and my family or my business?" There will be nonbank competitors who will not labor under that same difficulty in their customer offerings, and I doubt that they will be quiet about it.
Congress considered, debated, and rejected the narrow bank schemes in the 1990s. Shrinking the banking system and expanding the shadow banking world did not look very attractive then. I still do not see why inflating the shadow banking world makes for good national policy today.
Wayne A. Abernathy is executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association. Previously he served as assistant secretary of the Treasury for financial institutions and as staff director of the Senate Banking Committee.
