Were non-bank banks actually a good idea all along?

I’ve been wondering that for the last few days.  These entities were capped and banned in the late 1980s but once upon a time Sears Roebuck and American Express offered full banking services and their financial arms grew at a rapid clip.  They took deposits but did not make commercial loans, thereby skirting banking legislation at the time and, I believe, avoiding FDIC premiums.

The big debate today is how to get more capitalization for the banks, and we have such absurdities as Basel III, not bad in spirit but somehow wishing that a bunch of essentially insolvent institutions magically had another $700 billion or so.  I say the way to recapitalize banks is to keep them well capitalized to begin with.  Indeed, we just bought a new microwave at Sears the other night.  These institutions have a lot of commercial capital on the line.

At the time non-bank banks were banned because many people feared — and I can see why –that the non-bank banks would take big risks, backed ultimately by taxpayer money.  (The banks also didn’t like the “unfair competition” and indeed it was unfair but of course it would have been fair had the model been allowed to spread more widely, allow more of them or by allowing commercial affiliation more generally, even mixed with commercial lending.)  Prescient, no?  Well, sort of.  In reality, it turned out that the non-non-bank banks (i.e., the banks) did that anyway.  With all the financial instruments and risky loans around, it is so much an extra problem that Sears Roebuck might initiate an overly aggressive lawnmower marketing strategy?  I don’t know.

I do see the potential downside to the non-bank bank model, namely that systemic risk can become bigger yet through the traditional commercial sector.  Not every company is as safe as Sears and even Sears has not always been safe.  Still, at a time when the radicals amongst us wish that banks could be capitalized at say forty percent, is this not a model worth looking at once again?

Here is a 1987 Cato Institute defense of non-bank banks.  Here is further background.  And you can trace Adam’s posts on the idea here.


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