Sunday, February 16, 2014

Banks and Regulation

The essence of modern American banking regulation is that bureaucrats, with little or no banking or business experience of any kind, can create "one-size-fits-all" regulations that will oversee bank lending practices and make them "safer."

Increasingly, bank lending officers no longer make real decisions.  What they do, instead, is enforce government dictates as to who to lend money and on what basis.

Once upon a time this excessive regulatory regime was justified by the government's self-imposed obligations under the FDIC, which guarantee commercial bank depositors' accounts up to $ 250,000 per account.  You have to wonder: what is the point of this guarantee anyway?  Why can't depositors simply use money market checking accounts which are available at almost any financial institution?  These money market accounts are as safe as FDIC guarantees since most of the securities in money market accounts are US treasuries.

So why guarantee checking accounts at all?   The only shred of an argument left is the idea that such guarantees prevent bank runs, but there are many better ways to prevent bank runs than deposit guarantees.  It is not clear that bank runs, by themselves, are an evil, in any event.  If there were no government guarantees, then banks would fall under more intelligent scrutiny by depositors and unsafe banks would lose out in the market place -- something that cannot happen with government deposit guarantees.

If you think that abandoning deposit guarantees is a radical idea, what about the idea that banks today are no longer permitted to make loans that seem reasonable to them.  Instead, lending policy is simply dictated by the whim of whoever happens to occupy the White House at that moment.   Sounds like Russia or China, not the US, with obvious implications for resource allocation.

Dodd-Frank legislation and implementation has eviscerated free market lending through commercial banks.  Shadow lenders are emerging that will replace banks until the heavy hand of government decides to come after shadow lenders.

It is a never ending race between free markets and those intent on shutting them down.  Modern banking regulations spell the end of free market commercial banking as we once knew it unless Dodd-Frank is overturned.

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