It appears that we have finally reached the tipping point at which commercial banking is headed toward becoming a cost-plus monopoly, with rate-based assets much like a public utility and very close to a nationalized industry. Maybe not for all institutions, but I can envision a two-tiered system in which the 20 or so “too big to fail” entities fit the mold just described, with second tier status for regional and community banks. What this will mean is a much different culture, temperament and mindset, much less oriented to capital formation, entrepreneurship and innovation.
I predicted such an outcome over 20 years ago when I left commercial banking as a “refugee” of the banking debacle of the mid-1980s. All that was necessary was another major crisis of the kind we are currently experiencing at a time when the political left is positioned to reconfigure the regulatory environment. So now the planets are aligned for the next step, and you can see it coming in the discussions about the carryover Bush administration proposal for a single federal bank regulator with virtually no role for state authorities. This would be a huge mistake, a violation of the principle of federalism that has served us so well for so long, but one can see a compromise in the making–a sole federal role for the “too big to fail” and shared federal/state regulation for everyone else. The result will be a significant majority of commercial banking assets in the hands of what would soon evolve into a cost-plus public utility. Let’s hope that’s the worst outcome and that there remains a largely deregulated and innovative second tier of independent banks under state supervision, and by all means reject what would be an even worse outcome, a much discussed global bank regulatory agency, heaven forbid.