Does Banking-Commerce Divide Still Matter?

By Cocheo, Steve | ABA Banking Journal, March 2005 | Go to article overview

Does Banking-Commerce Divide Still Matter?


Cocheo, Steve, ABA Banking Journal


In New York City's Greenwich Village, not far from ABA Banking Journal's offices, lies Bank Street, a name going back to a 1798 epidemic that drove The Bank of New York to temporarily relocate there. Close by is Commerce Street, home to some old row houses, a small theatre, and a trendy restaurant. In a city of 10,000 intersections, these two thoroughfares never meet. And that, to some in the banking industry, including Alan Greenspan, is the way things should be.

This belief is no new matter, though it's one that has been bending even before the passage of the Gramm-Leach-Bliley Act. Indeed, the separation of banking and commerce has been treated as a holy tenet of American economic thinking. Only recently has FDIC broken step from the unified ranks of regulators, which we'll explore in a moment.

Prior to passage of GLB, the banking/commerce issue was seen on two levels. There was the more obvious distinction between banking services and outright, nonfinancial activities (operating a drugstore chain), but then there was the subtler distinction between banking and the insurance and securities businesses. GLB, of course, did away with the latter.

The separation of banking and commerce, as a concept, continues to be thrown into legislative battle, notably in recent congressional debates concerning the powers of industrial loan companies. Both ABA and the Federal Reserve oppose mixing the two more than they have already been.

Fortress or prison?

Some within the industry have argued that the continued insistence on separating banking and commerce hurts the banking industry as often as it helps. To this view, it looks like the only firms being constricted are the banks themselves.

For instance, opponents of banks getting into real-estate brokerage use the banking-commerce split as one reason to keep banks off the Realtor's turf. And yet commercial firms that are engaged in financial services offer realty services. One example is a division of Wal-Mart that deals in commercial real estate related to its store properties and unwanted or surplus parcels.

Late in 2004, a little-noticed FDIC study called into question whether the long-supported barrier between banking and commerce has ever really meant that much to the structure of the American economy.

The first formal glimpse of this research came in a short subsection of FDIC's Future of Banking project, published in the FDIC Banking Review for the first half of 2004. A key paragraph:

"Proponents of one view argue that the failure to maintain a line of separation--especially in terms of ownership and control of banking organizations--would have potentially serious consequences, ranging from conflicts of interest to an unwarranted expansion of the financial safety net. Proponents of the other view argue that, if adequate safeguards are in place, the benefits from affiliations between banking and commerce can be realized without jeopardy to the federal safety net."

Further on, the paper makes the point:

"Although the current prohibitions on corporate ownership of banks are sometimes defended on the grounds that banking and commerce have always been separate, the history of U.S. banking reveals no evidence of a long-term separation. Certainly the activities permitted to banks have always been subject to prohibitions, but the prohibitions on affiliations with commercial firms that are currently in effect stem from the Bank Holding Company Act of 1956 and its amendments. Despite these regulations and prohibitions, however, extensive links between banking and commerce have existed and still exist. "[Emphasis added]

Overblown fears, says FDIC

In the next edition of FDIC's review, published late last year, Christine Blair, senior financial economist in FDIC's Division of Insurance and Research, makes an extensively documented case that the wall between banking and commerce has long been built of sponge. …

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