Whether America's banks should be perceived — and regulated — as public utilities is a debate that cycles with economic crises, going at least as far back as the ruminations of Louis Brandeis as Congress debated what eventually became the Federal Reserve Act of 1913.
The idea offers seductive security: Utilities, though perhaps boring, are thought to serve the public with minimum risk and maximum public care. In the wake of the financial crisis, a little boredom may seem like a good thing. The view that banks are utilities is gaining currency and has the power to influence laws and rules well into the 21st century.
But that's unfortunate, because banks are not utilities, and a regulatory model based on such an equivalency is flawed for a number of reasons.
First, the utility model is best suited for economic activities in which the consumer, by virtue of the service (electricity, water, or telephone) has little choice. The very nature of these services, particularly the infrastructure investment they demand, dictates limited competition. That is not true in today's banking environment. Even in the face of trillion-dollar entities with considerable market share, consumers have access to multiple providers of financial services, big and small, foreign and domestic. Competition is alive and well in banking.
Second, America's past economic dominance is due in no small part to its creativity. As we tentatively emerge from a financial crisis that was abetted by new and untested products, it's easy to condemn innovation rather than celebrate it. But America has been a leader in bringing new and valuable financial products to the marketplace for decades, and these products have provided great benefits to savers, investors and American business.
Though there's an aging debate about the commoditization of banking, the product that utility consumers want is demonstrably more homogeneous than what banking consumers want. The multitude of successful business models developed to serve bank consumers is evidence of the specialization they demand. It is hard to believe that we could thrive in a modern, complex, global and technologically driven society without financial innovation.
Third, the U.S. financial system cannot operate in a vacuum. Developed and developing countries across the globe are building increasingly innovative financial systems and markets that will not stand still while the U.S. decides whether it will treat banks as utilities.
Is the proposed acquisition of the New York Stock Exchange, an icon of American capital markets and innovation, a wake-up call? If America does not permit — indeed, encourage — the continued evolution of an innovative financial system, we will see simply oe leading American industry move offshore.
Steel, television, autos — how can we support the well-being of the American people by encouraging the export of American business leadership?
This is not to say that we should dispense with sensible regulation of our financial system. On the contrary, American financial leadership is built on a history of safe, honest and well-policed markets and strong, well-supervised banks. But striking the balance between sound and meaningful supervision and excess is both an art and a science, and avoiding excess takes care.
This is not a theoretical debate. With hundreds of new regulations to write and implement, with new financial regulatory agencies in the birthing stage, whether banking morphs into more or less of a utility-like industry will depend upon what happens in the next several months. How banking organizations are supervised by the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Consumer Financial Protection Bureau will also play a role in whether or not banks look more like utilities. It is incumbent upon policymakers involved in this process to tread carefully in crafting thoughtful rules, lest we confine the innovative American financial system to a public utility box.
