By any other name, Part 1
What defines a bank? Is it a vast physical structure, with imposing granite Greek columns?
Where the money is?
Is it rather a depository of specie, to be guarded by detectives?
Egbert Souse, accent grave over the E
Is it then simply a receptacle to take deposits of cash and turn then into information?
(For in its purest essence, money is simply information acknowledged by all as being true.)
Yet if a bank limited itself to the deposit-taking function, it would be as a one-legged Tarzan: banks must put capital to work, by making loans or investments.
In other words, a bank is a continuing marketplace, where money providers (capital sources, including depositors) meet money consumers (borrowers). These fundamentals are captured in everyone’s childhood conception of the bank: the Savings and Loan Institution (not the ‘and’).
Banks are one floor of the capital-markets department store
(Where Holmes’s brother Mycroft holds court — thrilling blog post yet to come!)
The equilibration between deposit-taking (extracting money from a community) and capital-providing (injecting money in to a community) is the policy justification for the 1977 Community Reinvestment Act (CRA), one of the nation’s most successful interventions and a sterling example of effective public-private partnership. It tasks banks with recycling capital back to where they got it:
- The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations. It was enacted by the Congress in 1977 (12 U.S.C. 2901) and is implemented by Regulations 12 CFR parts 25, 228, 345, and 563e. (See Regulation).
- The CRA requires that each insured depository institution’s record in helping meet the credit needs of its entire community be evaluated periodically. That record is taken into account in considering an institution’s application for deposit facilities, including mergers and acquisitions. (See CRA Ratings) CRA examinations (see Exam Schedules) are conducted by the federal agencies that are responsible for supervising depository institutions: the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS).
As the financial sector consolidated over the last thirty years, the CRA evaluation has proven crucial to enabling some banks to grow by acquiring other banks,
Importantly, the GLB Act allows a financial holding company to engage in this wider array of financial or complementary activities only if all of the company’s depository institution subsidiaries are–and remain–well capitalized and well managed, and all of its insured depository institution subsidiaries maintain at least a “satisfactory” record of performance under the Community Reinvestment Act (CRA).
Thus it should come as no surprise that even today a CRA “Outstanding” rating is a prized corporate asset.
A mountain of evidence (including my personal experience with financial institutions all over the country), demonstrates that pursuit of CRA outstanding ratings has contributed materially – one might even say decisively — in giving banks the incentive to solve the urban-development and affordable-housing financial puzzles.
How can I put my money to work?
Pursuit of CRA investment test credit is a principal driver in LIHTC equity investment, leading to very high prices and resulting highly efficient use of government tax expenditures. And however much banks may tout their CRA performance, there’s no question it’s a burden to them, so if banks are competing against non-banks without a CRA obligation, they will be at a competitive disadvantage.
Consider then an entity that:
· Has an enormous market capitalization.
· Is active from coast-to-coast.
· Takes deposits.
· Makes loans and provides financial services to its depositors.
Is that a bank by any other name?
“O Romeo, that which we call a time-deposit, by any equivalent interest rate would yield as much.”
If it is, should it be subject to the CRA?
Ask Wal-Mart, as shown in this Economist article:
WHEN Wal-Mart rolls into town, small shopkeepers quake. Now that the world’s biggest retailer wants to enter the financial business,
Not Industrial Light and Magic: imagine their board of directors!
Another hearing is due to take place on April 25th. An ILC licence would allow the mighty retailer to offer banking services along with its cheap lawnmowers, DVD players and groceries.
Okay then, what are banking services? Cash a check, provide credit on a purchase? Things a large retailer already does:
Wal-mart insists it wants an ILC only to save money on processing the 140m credit-card and other transactions it pays banks to handle each year. The retailer points out that local banks run branches in 1,150 of its stores, with 250 more to come—a sign that it sees these banks as partners, not rivals.
Frightening, isn’t it?
That’s no evidence at all, since (a) Wal-Mart cannot today provide its own banks inside its stores, and (b) Wal-Mart could easily have realized that if its customers can bank at a Wal-Mart, they’re likely to buy more from Wal-Mart:
The prospect of this brought bankers, trade unions and community activists to the hearings to voice their opposition.
What about the customers? Were they in arms with pitchforks and burning torches?
You blasphemer, allowing check-cashing in a grocery store!
Wal-Mart testified that it “is absolutely and unequivocally committed not to engage in branch banking.”
So says Wal-Mart in April, when it is asking permission:
None of this has mollified the opposition. It believes Wal-Mart has bigger ambitions: in the past six years the retailer has tried (unsuccessfully) to buy banks in
But a risk for whom? Some opponents told the FDIC that a bank owned by a company of Wal-Mart’s size might engage in anti-competitive behaviour or destabilise the economy. However, ILCs owned by General Motors and General Electric, also gigantic companies, and Target, another retailer, have done no such damage.
Indeed, GMAC Commercial Mortgage (now Capmark) and General Electric Capital Corporation (GECC) have both been active players in affordable housing finance. GMAC CM went so far as to buy Newman & Associates, a large tax-exempt bond underwriter, and it in turn owned Paramount Financial Group, a national equity syndicator.
Once you commit a bank to a space, the bank naturally fills the whole delivery sequence/ value chain, which makes claims that “we’ll just dip in a toe” totally implausible:
Just one teeny tiny check …
And if Wal-Mart sticks narrowly to credit-card processing, as it says it will, its ILC will be less “bank-like” than many others.
True, but that’s a silly prohibition; once you are in the business of taking money and extending credit, limiting these activities by form rather than substance is largely arbitrary.
The dispute may be partly about protecting consumers or helping the economy, but it is also about Wal-Mart itself. Banks want to protect their turf.
Nice bankie, bankie, bankie.
If a new competitor is allowed on the field, banks will want anyone in the banking business to have to play by the same rules, including CRA.
And the company’s size, success and ways of doing business have won it some vocal enemies. More broadly, however, the fight raises bigger questions about regulating
Banking can be good business, so it should be no surprise that if commercial companies cannot own banks but can own ILCs, they will choose to do so:
ILCs first appeared around 100 years ago, as small, state-chartered banks that provided loans to industrial workers on low incomes who were shunned by traditional banks. They have remained largely exempt from
What if any are the risks of allowing these new competitors? And is there anything to the fears?
[Continued tomorrow in Part 2.]
