For me, the article serves 2 useful purposes. First, it's a reminder of why banking enterprise deregulation inward the 1980s together with 1990s wasn't unopen to clever ploy yesteryear the financial-sector lobbyists, but was absolutely necessary given the development of the manufacture at that time. To last sure, the deregulation could convey been carried out inward dissimilar ways, posing dissimilar risks, but unopen to sort of deregulation was unavoidable. Second, it makes the instance for limiting what banks are allowed to so. I'm completely persuaded that the proposed reform would brand the banking sector safer together with amongst less opportunity of needing a bailout, but I'm less sure that the reform would brand the fiscal sector every bit a whole safer. Let me say a flake to a greater extent than close each of these, drawing heavily on Morris's exposition.
The banking sector every bit it emerged from the 1930s had 5 characteristics salient for the give-and-take here: 1) it was overseen yesteryear banking enterprise regulators for safety; 2) it had access to a world security cyberspace of emergency loans from the Fed together with deposit insurance; 3) it was forbidden to become into other fiscal areas similar investment banking, securities dealing, or insurance; 4) it faced legal limits on the insurance it could pay on deposits; together with 5) it faced geographic restrictions on branching across acre lines together with inside states. In short, it was an manufacture that was shielded from competition, express inward what it could do, together with heavily regulated.
In the 1970s, the wheels began to come upward off this wagon. Those who wished to salvage coin began to seek out investment options similar usual funds, including coin marketplace usual funds, together with insurance companies. Banks were express inward the involvement charge per unit of measurement they could pay, together with inflation was high. Banks began to hemorrage deposits. Those who wished to borrow coin constitute other options, too. They borrowed through commercial paper, through high-yield bonds, together with through securitized markets including mortgage-backed securities together with asset-backed securities. Separate finance companies made automobile loans together with loans for retail purchases. Other companies financed merchandise receivables.
In short, both the savers together with the borrowers were migrating exterior the banking industry. Instead, the procedure of fiscal intermediation betwixt savers together with borrowers was happening exterior the banking industry, inward what came to last called the "shadow banking" sector. If the banks had non been deregulated together with allowed to compete inward this novel fiscal sector--at to the lowest degree inward unopen to ways--the banks themselves would convey shrunk dramatically together with a real large role of the the U.S. of A. saving together with borrowing would convey passed completely exterior the purview of the banking enterprise regulators.
As banks were allowed to compete across the fiscal sector to a greater extent than broadly, starting inward the 1980s, the manufacture began to consolidate. This made unopen to sense: when banks were allowed to opened upward branches across states together with across acre lines, for example, non every bit many pocket-size banks were needed. But the top banks non entirely became real large, but an ever-growing part of their assets were exterior the traditional line organisation of banking. Here's how Morris summarizes how the manufacture evolved (footnote omitted):
"Technological improvements, interstate banking, together with the GLB [Graham-Leach-Bliley] Act resulted inward fewer banks together with a much to a greater extent than concentrated banking industry, amongst the largest BHCs [bank belongings companies] ultimately engaging inward to a greater extent than varied together with nontraditional activities. For example, the number of banks barbarous from close 12,500 inward 1990 to close 6,400 inward 2011. The part of manufacture assets held yesteryear the 10 largest BHCs rose from close 25 per centum inward 1990 to close 45 per centum inward 1997 (just earlier the GLB Act) together with to almost lxx per centum inward 2011. The part of loans together with deposits of the top 10 BHCs
also rose sharply (Table 1). In addition, entirely 4 of the 10 largest BHCs that existed earlier the passage of the GLB Act stay today (Citigroup, JPMorgan Chase, Bank of America, together with Wells Fargo), amongst those 4 BHCs having acquired 5 of the other top 10 BHCs.
"Table 1 also shows how the activities of the 10 largest BHCs convey changed inward the yesteryear xiv years. In 1997, the part of banking assets relative to full assets at these companies was 87 percent, amongst entirely ane fellowship having a part less than lxxx percent. Today, the part of banking assets is 58 percent, amongst entirely 2 BHCs having a part greater than lxxx percent."
Morris's diagnosis together with proposed solution are straightforward. Bank belongings companies convey gotten into also many risky fiscal activities, together with thence should last restrained. But Morris is also clearly together with sensibly aware that only trying to plough dorsum the clock to 1930s-style regulated banking isn't possible. That toothpaste is out of the tube. He suggests that banks last allowed to pursue iii areas of business:
- Commercial banking—deposit taking together with lending to individuals together with businesses.
- Investment banking—underwriting securities (stocks together with bonds) together with providing advisory services.
- Asset together with wealth management—managing assets for individuals together with institutions.
- Dealing together with marketplace making—intermediating securities, coin marketplace instruments, together with over-the-counter derivatives transactions for customers.
- Brokerage services—brokering for retail together with institutional investors, including hedge funds (prime brokerage).
- Proprietary trading—trading for an organization’s ain line organisation human relationship together with owning hedge together with private equity funds.
Morris's proposal is for certain sensible enough, but it does larn out me amongst a distich of questions. First, if banks were belongings lots of mortgage loans, every bit they clearly could last nether Morris's proposal, thence they would convey been vulnerable to a meltdown of housing prices similar the ane that has occurred. Thus, it's non clear to me that anything inward this proposal would convey express the real aggressive habitation lending that occurred or the cost meltdown afterward. Indeed, the sort of express banks Morris advocates powerfulness inward unopen to ways convey been relatively fifty-fifty to a greater extent than exposed to losses inward the housing market.
Second, Morris's proposal, similar all "narrow bank" proposals, would clearly brand the banking sector safer. But ane of the disturbing facts close the fiscal troubles of 2008 was that it wasn't only commercial banks that were deemed to last systemically of import to the the U.S. of A. economy: it was also investment banks similar Bear Stearns, coin marketplace funds, insurance companies similar AIG, brokers that sell Treasury bonds, together with others. Focusing on banking is all real well, but the shadow banking sector together with the potential risks that it poses aren't going away.