Deciding what businesses a bank ought or ought not to be allowed to engage in is one of the most perplexing challenges government regulators face, in this country or any other.
If thats a question that makes your eyes glaze over, bear in mind that the wrong answer failure to draw the boundary lines in the right places can have grim consequences for a nations financial system, and its economy.
Generally, in the United States, banks have been kept separate from commercial ownership and activities. Today, as the result of bank modernization legislation, the Federal Reserve and the Treasury confront this question again as several major banks petition for the right to enter the real estate brokerage and property management businesses.
Their argument is that real estate brokerage and management are financial transactions, which banks should be enabled to perform, and not commercial transactions, from which historically they have been barred.
For most of my career, including my time as chairman of the Federal Deposit Insurance Corp., I didnt think it mattered if banks got into selling cars or real estate. I believed that separating commerce and finance was an arbitrary and unnecessary regulatory intrusion.
But my experience since I left the FDIC has changed my view. (If former Fed Chairman Paul Volcker reads this he will probably faint, but Chairman Greenspan also has changed his view.)
In the past 10 years, I have spent a lot of time in Asia, especially Thailand, China, and Japan, trying to help countries solve their serious banking problems, most of which were at least partially caused by commercial companies owning banks.
Some of the banks made loans to their owners that an independent bank would have expected to get repaid. Often these were unsound companies that should have collapsed, but were propped up to spare the banks from booking the losses. When there was no more good money to throw after bad, the economies of the Asian Tigers collapsed abruptly and catastrophically.
At the Resolution Trust Corp., where I was the first chairman, we also encountered unfortunate examples of the problems of mixing commerce and finance huge losses incurred by savings and loans in commercial transactions with related parties.
The longstanding government mandate to ensure the banking system stays separate from commerce is in place to protect the banking system. It seems to me that empowering banks to enter the real estate brokerage business would violate this mandate.
Selling a building is fundamentally a commercial transaction. Indeed, if the Fed and the Treasury decide to classify real estate brokerage as a financial activity, the distinction between commercial brokerage and financial brokerage will be lost. The outcome could open the doors to allow banks to broker anything, from automobiles to airplanes.
Homebuyers are also customers for insurance, future home equity loans, savings and investment products just about everything a bank offers at retail. Banks should not be put in a preferred position for this business, but should compete for it with the other vendors available.
The idea of banks selling real estate probably does not pose a great risk to the banks themselves or to the safety and soundness of the nations financial system. But allowing banks to enter real estate takes a step down the road to mixing commerce and finance.
A wise old Roman saying comes to mind: Resist the beginning. The Fed and the Treasury should heed it.
Mr. Seidman is a former chairman of the Federal Deposit Insurance Corp.
