Tag: banking industry

Bank Deregulation and Income Inequality

Since the financial crisis, “deregulation” has become a catch-all phrase for everything that went wrong in our financial markets.  Unfortunately said deregulation is rarely ever explained, but is rather asserted.  To truly inform policy debates, discussions must center on specific instances of deregulation.  One such example of banking deregulation that did actually occur was the The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (imagine that, a Democrat Congress and a Democrat President deregulating the banking industry).  The heart of Riegle-Neal was to remove barriers to interstate branching. 

A recent article in the Journal of Finance looks at the impact of bank branching deregulation on the distribution of income across U.S. States.  A working paper version can be found here.  The researchers find that as bank deregulation increased competition and improved efficiency, “deregulation materially tightened the distribution of income by boosting incomes in the lower part of the income distribution while having little impact on incomes above the median. Bank deregulation tightened the distribution of income by increasing the relative wage rates and working hours of unskilled workers.”  The bottom line is that the increased competition that resulted from deregulation disproportionately benefited those on the bottom of the income distribution.  As Washington continues to pile additional new regulations upon the banking industry, we should bear in mind that much of the impact of increased regulation might be felt by those least able to bear it.

The extent to which regulatory barriers in banking benefits the rich at the expense of the poor is also illustrated in a forthcoming article, again in the Journal of Finance.  In this article, the authors find in the early 20th century, counties where the elite had disproportionately large land holdings had fewer banks per capita, with costlier credit, and more limited access. The authors see this as suggestive that elites restrict financial development in order to limit access to finance, and hence maintain existing income inequalities.

One of the lessons I take away from these papers is that we need to examine banking regulation/deregulation as it actually occurs and is implemented, and not how we believe some all knowing, benevolent government would impose it.  The odds seem to me that the more extensive is banking regulation, the more likely it is to be captured by economic elites and narrow interests.

Mortgage Mods: Congressman Prefers Coercion over Cooperation

The recent focus in Washington on mortgage modifications once again illustrates one of the most fundamental flaws in current political debate:  the notion of using government to threaten or force the “voluntary” transfer of wealth from one group of citizens to another.

Just this week Rep. Barney Frank warned the banking industry if they don’t “voluntarily” do more to reduce foreclosures, Congress will step in and make them do so, by allowing bankruptcy judges to re-write mortgage contracts.  This proposal is really nothing more an ex poste transfer of wealth from investors in mortgage backed assets to borrowers.

Of course, Rep. Frank and others respond that they are only trying to “bring lenders to the table” in order to keep negotiations going.  In the words of many “consumer” advocates, this is just a “stick” to the motivate the lenders.  I could think of few things more offensive to a free society.  In a government truly constituted on the notion of the common good or general welfare, it would be no more appropriate to use the stick of the state on lenders than it would be on borrowers.  Government quite simply should not take sides in purely private disputes. 

One would think that if anyone could understand the principle that government should not interfere in the private, voluntarily entered relationships of consenting adults, it should be Mr. Frank.

Out of the TARP, But Still on the Dole

While banks such as Goldman and J.P. Morgan have managed to find a way to re-pay the capital injections made under the TARP bailout, their reliance on public subsidies is far from over. The federal government, via a debt guarantee program run by the FDIC, is still putting considerable taxpayer funds at risk on behalf of the banking industry.  The Wall Street Journal estimates that banks participating in the FDIC debt guarantee program will save about $24 billion in reduced borrowing costs of the next three years. The Journal estimates that Goldman alone will save over $2 billion on its borrowing costs due to the FDIC’s guarantees.

One of the conditions imposed by the Treasury department for allowing banks to leave the TARP was that such banks be able to issue debt not guaranteed by the government.  Apparently this requirement did not apply to all of a firm’s debt issues.  These banks should be expected to issue all their debt without a government guarantee and be required to pay back any currently outstanding government guaranteed debt.

To add insult to injury, not only are banks reaping huge subsidies from the FDIC debt guarantee program, but the program itself is likely illegal.  The FDIC’s authority to take special actions on behalf of a failing ”systemically” important bank is limited to a bank-by-bank review.  The FDIC’s actions over the last several months to declare the entire banking system as systemically important is at best a fanciful reading of the law. 

The FDIC should immediately terminate this illegal program and end the continuing string of subsidies going to Wall Street banks, many of which are reporting enormous profits.