There’s a better way. It’s time to separate depository banks from other financial businesses and treat them as public utilities.
Depository banks — which include commercial banks, thrifts and credit unions — are distinct from financial services such as asset management or investment banking. They provide a basic public service: issuing and circulating deposit money, which includes checking and savings account balances. These outstanding balances amount to more than $17 trillion. And people rely on them every day to go about their lives: to pay their rent and credit card bills and receive their salaries. Businesses also depend on deposits for nearly all their major transactions, from covering their costs to receiving payment from their customers.
In most transactions, actual cash never changes hands. Indeed, there is only $2 trillion of government-issued cash in existence, and much of it circulates overseas. Our economy runs on deposit money.
Deposit banking is therefore like the infrastructure provided by electricity, water and telecommunications companies. When a bank fails, it’s like part of the electric grid going down: The consequences extend well beyond the bank’s immediate customers.
Congress originally set up our banking laws along public utility principles. Banks were chartered to meet the deposit needs of the community, subject to strict limits on the sorts of activities they could engage in. Critically, they were the only entities permitted to provide households and businesses with cash equivalents such as checking and savings accounts. But with the deregulatory craze of the past 40 years, many provisions that ensured a stable and accessible money supply — provisions that prevented “too big to fail” bailouts and excessive risk-taking — were watered down or repealed. Firms such as Lehman got into the business of banking, but they did not comply with bank regulations.
After Lehman failed, Congress took steps to reduce the likelihood of future crises. The Dodd-Frank Act of 2010 enhanced financial stability in many ways. But it did nothing to restrict to banks the activity of creating cash equivalents — nor to subject banks to the sort of strict public utility oversight that had existed throughout much of the 20th century.
More fundamental structural reform is needed. Already twice this decade, the federal government has taken extraordinary measures to avert financial collapses. In March 2020, the Federal Reserve committed trillions of dollars to prevent the failure of dozens of highly leveraged hedge funds, broker dealers and foreign financial institutions that had gotten into the business of creating cash equivalents outside of the regulated banking system. Then, this year, it stepped in to rescue banks — most notably the Silicon Valley Bank — that had loaded up on interest-rate risk and uninsured deposits.
Although there have been no catastrophic financial meltdowns since Lehman, the resulting stability is illusory: It rests on the government’s willingness to do whatever it takes to prop up both banks and non-bank financial firms.
As a result, too-big-to-fail banks keep expanding. Financial firms profit from public sector bailouts. And asset prices outpace economic growth, exacerbating the housing affordability crisis.
A 21st-century public utility approach to banking would help break this cycle.
First, it would reinstate limits on bank powers that the Supreme Court has gutted, making banks less likely to engage in high-risk speculation and easier for regulators to oversee.
Second, it would separate depository banking from dealing or speculating in securities and financial derivatives. Wall Street investment firms would have to stand on their own feet. If they took too many risks, they could go through bankruptcy without jeopardizing the rest of the financial system — or the economy.
Third, non-bank financial institutions such as Lehman would be prohibited from financing their operations with cash equivalents. Non-banks shouldn’t be allowed to issue deposits by another name.
Finally, everyone who wants a bank account would be able to get one without worrying about being hit by predatory fees and without having to pay to transfer their money quickly. As the government stands behind deposit accounts, it should set the terms on which banks offer them, just as it establishes standards for electrical service.
Often, the most salutary legislation is passed in the wake of a crisis. But we need not wait until conditions deteriorate further to start building a more stable, more reliable banking system.
