It has occurred to many people that bank holding companies might be an endangered species. Thanks to nationwide branch banking, they're no longer essential for geographic expansion. thanks to the comptroller of the currency, they're no longer necessary for product-line expansion.
The comptroller has been moving aggressively to modernize the national bank charter. He basically has said that national banks may engage-either directly or through operating subsidiaries-in virtually any activity related to finance.
The Federal Reserve derives much of its power over banks from its position as the exclusive regulator of bank holding companies. It would very much like to limit bank expansion to the holding company vehicle.
The Fed and/or its supporters in Congress tried two arguments against the comptroller's actions. The first was that the comptroller lacked legal authority. Four unanimous, strongly worded Supreme Court decisions backing the comptroller pretty much put that argument to rest.
The second contention was that organizing new activities in holding company affiliates would better insulate banks from risk than conducting the activities directly in banks or their subsidiaries. This proposition failed because the activities being authorized are less risky than those in which banks are already engaged, and there's no support for the notion that holding company affiliates provide better insulation than bank subsidiaries.
Not easily discouraged, the Fed is now trying a third argument. Fed Chairman Alan Greenspan testified before a House subcommittee that banks are subsidized by the federal "safety net"-i.e., deposit insurance and the Fed discount window. He argued that Congress should limit "the spread of both the moral hazard and the subsidy implicit in the safety net" by forcing banks to place their new activities in holding company affiliates.
It is hard to make the case that the deposit insurance system amounts to a government subsidy for banks. The federal deposit insurance fund, established in 1934, stands today at $26 billion.
No taxpayer money has been lost in the Bank Insurance Fund. Moreover, the Federal Deposit Insurance Corp. is required to set bank insurance premiums at whatever level is necessary to cover losses and maintain the fund at an acceptable level. The banking industry has more than $50 billion of annual after-tax earnings and $450 billion of capital and reserves to backstop this guarantee of the FDIC fund.
Federal deposit insurance undoubtedly involves subsidies, but not the one suggested by Mr. Greenspan. Stronger banks subsidize weaker banks.
It's equally difficult to discern a subsidy of banks through the Federal Reserve system. Each year the Fed turns over to the Treasury several billion dollars of profit.
A decent chunk of the profit is derived from the non-interest-bearing reserves banks are required to maintain at the Fed. To my knowledge, all loans to banks through the discount window bear interest and are fully collateralized, and the Fed has never lost money on a window loan.
Nothing in the market performance of banks suggests the existence of a government subsidy. Banks' share of the nation's financial sector assets has declined steadily from roughly 40% to 20% during the past 30 years.
If there were a subsidy, it would seem more appropriate to eliminate it than to impose further operating restrictions on an already declining industry.
The issue of whether to require expanded bank activities in holding company affiliates will not die easily. The stakes, in terms of regulatory turf and power, are high.
The stakes for the banking industry are even higher. Much of the freedom to compete that banks have garnered in the past decade has resulted from their ability to seek the most progressive regulatory forum.
Banks must fight to preserve their ability to expand through state- chartered banks, national banks, or holding company affiliates. Competition makes both markets and government agencies work much better.