Friday, July 12, 2013

This Week in Bank Failures

The 1999 repeal of the Glass-Steagall Act, which had set up a wall between Wall Street and banking, was supposed to breathe new life into a dying banking industry. Instead, the new regime ushered in by the repeal sliced profit margins at the larger banks so thin that every one of them was at the edge of financial collapse even in a good year. The same changes also weakened Wall Street, paving the way for its 2008 collapse. There has been talk all along about reinstating Glass-Steagall, but now there is real momentum, with a new Senate bill that has four prominent sponsors and a credible five-year transition plan.

The Glass-Steagall repeal was supposed to set up fruitful combinations of banking and insurance, but that idea was a disaster. The guinea pigs in this experiment were Citibank and Travelers, which combined to form Citigroup — indeed, it was the prospect of this deal that persuaded Congress to act on the Glass-Steagall repeal. But the bank and the insurance company barely survived their marriage and subsequent divorce.

What we are left with, then, is a highly dysfunctional arrangement of banks owned by Wall Street. The high-stakes gambling mentality of Wall Street has filtered down into the banks to the point where even having a checking account is like a roll of the dice. Most banking customers don’t know what fees their banks will charge them from one month to the next because the fee schedules have become that complex — and because the banks themselves often don’t quite know what their own rules are. Account holders in the giant banks don’t know in advance when they will gain and when they will lose, but they continue to hope that this is will be one of the months when they get lucky.

This approach to banking has become so unpopular that I believe there is a real chance that Glass-Steagall could be reinstated next year. Along with it, there could be real reforms that take away big pieces of the shadow banking system — and people will start to remember what a real bank looks like. It was less than a generation ago that banks prided themselves on reliability, stability, and integrity — on handling transactions simply and correctly. That is the kind of banking that could come back with the new Glass-Steagall Act.