The Road to Financial Reformation by Henry Kaufman

Author:Henry Kaufman [Kaufman, Henry]
Language: eng
Format: epub
ISBN: 9780470539941
Published: 2010-05-10T16:00:00+00:00

11

Banking and Commerce Should Not Merge

By the end of the 1980s, most of the barriers separating various financial businesses had been dismantled. That was not enough for some advocates of deregulation, who sought to remove the long-standing barrier separating banking and commerce. I opposed such merger when I testified before Congress in May and September of 1991, and I continue to oppose it today. I believe it ultimately puts in jeopardy the fundamental economic democracy of this country and undermines the crucial need for independent deposit institutions exercising objective credit judgments.

A merger of banking and commerce would tend to produce an undesirable concentration of economic and financial power, while providing no significant compensating benefits. Ownership and control of banks by large commercial and industrial firms are not necessary for attracting needed new capital into the industry, even for troubled banking institutions that have a reasonable chance of restoring their viability.What is necessary is to rebuild investor confidence in the financial health and profitability of deposit institutions over the long term. Such confidence has been severely impaired in recent years, which has been the most difficult period for the banking industry since the 1930s.

Banks, savings and loan associations, and other financial institutions, including insurance companies, have been confronted with extraordinary credit problems that must be overcome before they can fully restore their basic financial soundness. Under these difficult circumstances, it is easy to understand why many deposit institutions have found it hard to raise capital in the open market. But as they move to strengthen their balance sheets and put in place risk controls to prevent a recurrence of imprudent lending, the capital markets will respond positively.

A necessary precondition is to deal with the apparent failure of the regulatory system to anticipate and forestall this outburst of excessive lending, whether to risky real estate ventures or to dangerously overleveraged companies. The collapse of the Federal Savings and Loan Insurance Corporation (FSLIC) and the recurrent warnings that the Federal Deposit Insurance Corporation (FDIC) may also be in danger of insolvency are an important element. But the problem of the deposit insurance funds is by itself only one of a number of serious weaknesses in the financial regulatory system. There needs to be fundamental change in this area before banking, which is appropriately a regulated industry, is seen to be a good place to invest.

It would be unfortunate if the Administration and the Congress shied away from the arduous work of forging a compromise program of comprehensive regulatory reform that will permit deposit institutions to recover and prosper and that will rectify those regulatory weaknesses that permitted the lending mistakes of recent years. Settling for what might be a short-term expedient for recapitalizing the deposit insurance funds would be insufficient and could be counterproductive, to the extent that stopgap measures might further worsen the value of the banking franchise.

If farsighted, comprehensive reforms are made, however, once the process of rehabilitation of troubled institutions is well along, I have no doubt that many banks now excluded from the capital markets will be able to return.

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