By Stephanie K. Mann, J.D.
Mixing banking and commerce can generate efficiencies that deliver more value to customers and can improve bank and commercial company performance with little additional risk, argued Acting Comptroller of the Currency Keith Noreika at the Clearing House Annual Conference in New York City. Addressing what has been a “taboo” subject for banking regulators, the separation of banking and commerce in the United States, Noreika offered his alternative to the narrative.
Traditionally, banking and commerce have been separated to protect banks from the corruptive power of commercial ownership and protect the market from banks consolidating and wielding too much commercial power.
Exceptions. Under current federal law, exceptions are provided for some firms to mix banking and commerce more freely. However, said Noreika, these exceptions provide an unfair advantage. Namely, “well-lawyered and well-connected companies tend to gain and benefit from special exceptions, privileging them over the bulk of firms that must live under the weight of a general prohibition against mixing banking and commerce.” This results in the very consequences that the prohibition was intended to prevent: “advantaging and aggrandizing a few at the expense of the many.”
Inherently safer? Noreika then questioned whether separating banking and commerce makes the economy more secure, particularly following the recent financial crisis. “Even when separated, risk can build in one part of the system with less rigorous supervision and become a contagion spreading to infect the whole,” said the Acting Comptroller. He pointed to the recent examples of Bear Stearns and Lehman Brothers, who, because they were not banks, were not regulated with a system of checks and balances and not required to have a diversified and stable sources of liquidity and capital. Yet these companies played a significant role in the financial crisis.
By allowing banks and commerce to intermingle, Noreika believes that meaningful competition will emerge which could have a number of positive effects, including tempering the risk concentrated in having just a few mega banks. In addition, it could make more U.S. banks globally competitive and promote economic opportunity and growth domestically and the development of better banking services, greater availability, and better pricing. “If a commercial company can deliver banking services better than existing banks, we hurt consumers by making it hard for them to do so,” stated Noreika.
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