Attack on Banks Is a Threat to Nation's Future
The U.S. government is actively attempting to shrink the banking and thrift industries. The capital base of banks and thrifts, so the argument goes, is inadequate to support an industry of the present size.
Cutting back the size of the banking industry, according to shrinkage proponents, would greatly reduce the amount of deposits that need backing by federal insurance, decreasing the potential cost to the taxpayer.
Policymakers and academics are discussing a far more incendiary reason to reduce the size of the banking industry: The United States no longer needs its banks.
This theory holds that other institutions can handle all the functions now performed by banks - at lower cost, more efficiency, and greater benefit to the public. Banks are seen as "buggy whip" companies with weak management, making bad loans, operating with high costs and obsolete systems.
But those who would stifle the banks would also stifle the creativity and growth of the U.S. economy.
Who Needs Banks?
Shrinkage proponents say the consumer side of banking - auto loans, credit card operations, even deposit gathering - can be better handled elsewhere.
They also claim that bank efforts on the corporate side are supplanted by the commercial paper markets and capital market activities of nonbanks.
(Companies such as Alltel Corp.'s Systematics and General Motors' EDS Corp. are already coopting the data processing and accounting functions traditionally handled by banks.)
Waiting for the Nonbanks
Washington is actively considering the antibank theory.
For the first time since the widespread adoption of Keynesian economics, the government is not stimulating bank lending to take the economy out of the current recession. Presumably, it is felt that nonbanking companies would provide the credit that the nation needs at this juncture.
Furthermore, the current debate in Congress continually revisits the notion that nonbanking companies should acquire banks, to provide the capital that banks need.
The banks are seen as incapable of raising these funds through profitable internal operations.
Nevertheless, banks provide important services to the community. Failure to stimulate bank lending harms the economy.
Banking companies excel in labor-intensive financial services: lending to small and mid-size corporations, private or trust banking, and servicing the revolving personal loan market.
In the financial sector, banks offer the most - often the only - help to the elderly, the under-educated, and minorities. Banks provide deposit services and credit to people and businesses that lack the financial standing, size, or knowledge base to obtain these services elsewhere.
When the government forces banks to shrink, the result is a reallocation of resources to large, successful corporations that can operate without bank funding. And monies concentrate in a limited number of hands - those able to operate successfully in the overall money markets.
Small Businesses Stifled
Consider the impact of bank shrinkage on the small to mid-size American corporation.
Banks monitored by the Federal Reserve have reduced loans to domestic corporations in the past year by an incredible $23 billion. There has been no comparable reduction in loans to big corporations.
Furthermore, "for big companies, the recession's end will make capital even easier to come by," said Fed Vice Chairman David W. Mullins Jr. in Business Week. "But things will be tight for everyone else."
Frank V. Cahouet, chairman of Mellon Bank Corp., added: "A whole segment of companies won't get financing and will atrophy. You will have to wait four years for this to loosen up."
The biggest losers, according to Business Week, are small businesses cut out of the credit flow.
Why is this so bad? Business Week says these companies are "a key source of innovation, and, by some calculations, create more than half of all new jobs."
The $95 billion personal computer industry was not created by IBM, with financing from the Eurodollar markets. The personal computer was created by Apple, which at first operated out of a garage and then was financed by banks willing to take the risk.
All those new jobs the Reagan administration was so proud to report in the 1980s did not come from large corporations funded by commercial paper. They were developed in small companies funded by banks.
The decision to force banks out of the lending markets is clearly having effects on the economy and society well beyond what is envisioned by frightened legislators and regulators.
People who would stifle the banks are concerned solely with the potential taxpayer cost of Federal Deposit Insurance Corp. coverage.
No one is analyzing the cost on the other side: the price in lost jobs and business opportunities if Frank Cahouet is right.
All Sizes Too Big to Fail
Banks must be stimulated to take risks - to invest in future Apple Computer companies and massive job creation. This means reaffirming FDIC insurance and doctrine of "too big to fail."
This doctrine, by the way, has been in place for a few hundred years in every western country. In the United States, "too big to fail" is being applied to small banks as well as big ones.
The ridiculous risk-based capital rules must be eliminated, allowing banks to leverage their balance sheets. We must be willing to accept a near-term financial loss - which will be much smaller than the long-term loss to be suffered if these policies are not once again embraced.
That cost is in innovation and jobs. It is not easily calculated against the $70 billion now being sought to shore up the Bank Insurance Fund.
Strange as it may seem to people who equate banks with Michael Milken, these companies are actually the most populist in the United States - because they are the only ones willing to fund grass-roots American business.
Mr. Bove is a banking consultant with the Bove Group in Chatham, N.J.