Lowering the Barriers to Bank Mergers Is Inevitable

Not so many years ago, futurists expected the imminent arrival of “the financial department store,” one-stop shopping where customers could find anything their hearts might wish in financial services: checking and savings accounts, mutual funds, personal and auto loans, credit cards and mortgages, brokerage accounts, futures contracts, foreign exchange for use or speculation, insurance policies. Bankers, restricted to plain-vanilla banking services by New Deal legislation, gnashed their teeth in envy, and were left with making questionable loans to developing countries, junk bond artists and real estate developers.

American Express acquired a large insurance company, the country’s second largest brokerage firm and a family of mutual funds to go with its credit cards and travelers’ checks and foreign banks. Prudential jumped into stock brokerage, limited partnerships and real estate brokerage. Merrill Lynch offered checking accounts and credit cards and its own money market funds, and bought one of the largest real estate brokers.

The player the banks really envied was Sears, which had its own storewide credit program plus its own credit card, two S&Ls, a trust company, one of the country’s biggest insurance companies, a real estate brokerage and an auto leasing company, in addition to the stock exchange house Dean Witter. Floor space in the stores was redecorated for financial services salesmen. Economist Bill Ford, then president of the Federal Reserve Bank of Atlanta, offered a slogan for Sears Financial Services: “If you lose your shirt, we’ll sell you another.”

Then, suddenly, most of this was gone. Amex sold Shearson-Lehman, Sears sold its S&Ls, trust company and Dean Witter, and the only reason Prudential didn’t sell Bache was that nobody would buy it. Merrill sold Century 21. But the banks still resented the fact that all these companies could do things they couldn’t, and despite their often negative experiences in businesses they didn’t understand very well, the travel and brokerage and insurance and retail companies still wanted to cut out the middleman and do banking business for themselves.

Banking is the heavy metal of public interest, because more of the nation’s money supply is created by the banks than by the Mint. What banks can do and what nonbanks can’t do is governed in large part by laws written to exorcise the Great Depression. These laws were not necessarily stupid. Restricting banks to their own locality permitted interest rates to be low where the regional economy was sagging and high where it was booming.

But technology has made these laws obsolete. In the age of the Internet, the money market is inescapably nationwide. When I moved to Washington and my bank account was still in New York, I thought it was stupid that I could take cash from a Citibank ATM in D.C. but had to mail the check back to New York to make a deposit. In fact, it was stupid. But it was—and still is—the law.

Computers and telecommunications machinery have ended the distinctions between checking accounts that have to be processed every day and brokerage accounts that used to be called up only periodically. Computers settle securities transactions in the blink of an eye, calculate and expose the implicit options in what once were considered simple investments like home mortgages.

Differences that seemed immutable—like that between a bond with fixed terms sold to the public and a loan with renegotiable terms shared by several banks and insurance companies—become insignificant. Up in the trading rooms where the screens glare at serried ranks of overpaid frenetic young people trading bonds and loans interchangeably.

Observing what was happening, the banking regulators relaxed their rules: The Federal Reserve dented the New Deal laws to let banks sell securities services, and the comptroller stretched a geographical loophole to allow banks to sell insurance, though the branch supposedly doing the business had to be in a small town.

More than a quarter of a century has passed since Richard Nixon’s Commission on Financial Structure and Regulation urged that “all institutions competing in the same markets do so on an equal basis.” (Federal Reserve Chairman Alan Greenspan, then a private consultant, was one of the commissioners.) This year was to be the one when we would get radical reform, “financial modernization.” Banks would get the right to own and operate full-scale securities firms and to sell insurance anywhere. Securities firms and insurance companies would get the right to own banks. “Firewalls” would keep the banking system safe and sound. Theoreticians had another wish: Banking should be recognized as a business like other businesses, and banks should be permitted to own nonfinancial companies.

But banking isn’t—yet—a business like other businesses. Other businesses can’t pay their bills or make investments or reward their friends by issuing liabilities the government guarantees. The “safety and soundness” of banks is important to everybody, not just the bankers. If the government has to worry about the banks, then it has to worry about the subsidiaries of banks, and the government has enough to worry about already.

The problem the modernizers then faced is that insurance companies and securities firms already have nonfinancial subsidiaries. A bill that continued the prohibition against mixing banks and commercial companies might not give them enough goodies to win their support. We’re talking legislation here, son, a world where if you gore the wrong ox, you’re dead. From optimism in January came pessimism in May.

Finally, the Treasury Department looked at financial modernization from a consumer perspective: Let’s get more competition into stock brokerage and insurance brokerage and banking. The country now spends $300 billion a year on financial services; let’s see if competition can knock $30 billion off that. On the mixture of banking and commerce, Secretary Robert Rubin offered a Chinese menu: Column A you mixed within some fairly tight limits, Column B you kept separate. On the question of who would regulate what, Treasury went for continued supervision of securities work by the Securities and Exchange Commission and insurance work by the insurance commissioners, who have a history of protecting the public and the policyholders, rather than by the Fed, which protects the banking system.

Most of the Treasury’s new proposals would simply legalize or regularize what’s already, if awkwardly, happening. More and more, our economy makes financial decisions in the markets, not at the banks, and we use devices that don’t necessarily have to involve banks—credit and debit cards, telephones and computers—to make our payments.

The time will come when banks are just like other businesses, and banking and commerce can mix and match. But as Greenspan recognized in his testimony last week to the House Banking Committee—important testimony, because he used to be on the other side—that time is not yet. Now we should find out if there really are public benefits, not just ways for some companies to make some money, in dismantling the regulatory barriers that blocked the financial department store.