Acting comptroller suggests rethinking separation of banking, commerce

The recent financial crisis demonstrated that there is “nothing inherently safer about separating banking and commerce or traditional banking and investment banking,” the acting comptroller of the currency said Wednesday in offering “an alternative to the popular narrative” about separation of banking and commerce.

Speaking to The Clearing House Annual Conference in New York, Acting Comptroller of the Currency Keith A. Noreika said reinstating Glass-Steagall restrictions limiting the co-mingling of banking and commercial activities – or continuing to look for ways to separate banking and commerce even more — will not make the banking system any safer because “mixing the two did not weaken the system in the first place.”

“Even when separated, risk can build in one part of the system with less rigorous supervision and become a contagion spreading to infect the whole,” Noreika said. “Consider both Bear Stearns and Lehman. Neither of these companies were banks. They were not regulated as banks and functioned as commercial investment firms without the checks and balances of a prudential regulator and the strength of more diversified and stable sources of liquidity and capital.

“Conversely, look at IndyMac, WAMU (Washing Mutual Savings), and Wachovia. Nothing about these banks was exotic. Still, they faltered, impacting millions of consumers, and played a significant role in the crisis,” he said.

Noreika asserted that danger to the financial system is not the size of the banks, but the concentration of banking in particular areas of financial services. “The solution to concentration is not further isolation and protectionism, but diversity and healthy competition. Laws that prevent companies with resources and means from becoming competitor banks only serve to protect existing big banks from would-be rivals. It has the perverse effect of maintaining the concentration in the big banks that exists today,” he said.

Noreika said that, before the financial crisis of 2007-09, “a rich dialogue” about the benefits and risks of allowing banking and commerce to mix more freely was occurring. “It was a healthy policy discussion and seemed to be inspiring significant research into the subject,” he said. “Unfortunately, the crisis has been used as an excuse to silence that discussion, even though the evidence and data show that combining banking and commerce had little to do with the cause of the crisis and the Great Recession that followed.”

Noreika called for fresh research that looks at banking and commerce. “In having that conversation, we might find opportunities to do things a little differently, and we might start a powerful and beneficial economic engine,” he said.

Noreika comments: The Clearing House Annual Conference, Nov. 8