COLUMN: Banks Are Not like Utility Companies

Article excerpt

Byline: Eugene A. Ludwig

Whether America's banks should be perceived - and regulated - as public utilities is a debate that cycles with economic crises, going at least as far back as the ruminations of Louis Brandeis as Congress debated what eventually became the Federal Reserve Act of 1913.

The idea offers seductive security: Utilities, though perhaps boring, are thought to serve the public with minimum risk and maximum public care. In the wake of the financial crisis, a little boredom may seem like a good thing. The view that banks are utilities is gaining currency and has the power to influence laws and rules well into the 21st century.

But that's unfortunate, because banks are not utilities, and a regulatory model based on such an equivalency is flawed for a number of reasons.

First, the utility model is best suited for economic activities in which the consumer, by virtue of the service (electricity, water, or telephone) has little choice. The very nature of these services, particularly the infrastructure investment they demand, dictates limited competition. That is not true in today's banking environment. Even in the face of trillion-dollar entities with considerable market share, consumers have access to multiple providers of financial services, big and small, foreign and domestic. Competition is alive and well in banking.

Second, America's past economic dominance is due in no small part to its creativity. As we tentatively emerge from a financial crisis that was abetted by new and untested products, it's easy to condemn innovation rather than celebrate it. But America has been a leader in bringing new and valuable financial products to the marketplace for decades, and these products have provided great benefits to savers, investors and American business.

Though there's an aging debate about the commoditization of banking, the product that utility consumers want is demonstrably more homogeneous than what banking consumers want. The multitude of successful business models developed to serve bank consumers is evidence of the specialization they demand. It is hard to believe that we could thrive in a modern, complex, global and technologically driven society without financial innovation. …