Non-Banks Are Non-Starters
Congressmen on the House Banking Committee have been getting themselves into something of a lather about the danger that the giant money-center banks, with the connivance of the Comptroller of the Currency, are about to make an end run around the rules forbidding interstate banking. But the play the banks have chosen for this purpose is virtually guaranteed to leave them at the line of scrimmage (if not behind it). Ideally, the congressmen should calm down -- and the banks should forget it. We should be so lucky, on either side.</br></br>"The commercial banks went into the consumer business for the cheap money," John Heimann said when he was Comptroller of the Currency a few years ago. "Now that the cheap money is gone, they will go into other businesses."</br></br>That made sense: The most casual look at annual reports demonstrated that there was no longer any reason for the New York and Chicago banks to envy the Bank of America and North Carolina National Bank because they had branches all over their states and funded their loans from people's checking accounts. Inflation and the market interest rates it created had persuaded lots of ordinary middle-class people to economize on cash and keep money in interest-bearing accounts even if they planned to spend it fairly soon. If the banks were going to have to buy the money they lent, branches were a very expensive way to make the purchases. Indeed, many of the big banks have been confirming this analysis during the past few years by closing long-established branches -- some noisily with public pronouncements, some stealthily to avoid stirring up the animals among the consumer-activist groups.</br></br>Now, quite suddenly, the big banks have filed requests with the Comptroller for charters that would allow them to operate 300 new branches in other states. These would not even be real, full-service branches, for the McFadden Act and the Douglas Amendment to the Bank Holding Company Act still forbid banks to open branches or subsidiary banks in states other than their home state, unless the state that is being invaded has given its approval. The charters being requested are for what the trade calls "non-bank banks," a Dr. Seuss creature born of the cleverness of the late Charles Bluhdorn's Gulf & Western in exploiting the definition of the word "bank" written into the 1970 amendments to the Bank Holding Company Act.</br></br>Under those amendments, a bank is a bank only if it both accepts demand deposits subject to withdrawal by check and makes commercial loans. It is fashionable these days to describe this definition as a "loophole," but in fact there was considerable discussion in the Senate (where the language originated) about the need to protect finance companies, trust companies, savings and loan associations, and credit unions from the stifling regulatory embrace of the Federal Reserve. Moreover, the definition is reasonable: A bank that cannot take demand deposits is out of the loop of money creation (what goes out of the bank via the lending or withdrawal doors does not come back in automatically in the flow of people's payments for goods and services), and a bank that does not make commercial loans clearly isn't a "commercial bank," which is the kind of bank people mean when they use the word.