Magazine article American Banker

Heavier Burden on Banks Imperils All Financial Firms

Magazine article American Banker

Heavier Burden on Banks Imperils All Financial Firms

Article excerpt

We make a major mistake by not leveling the regulatory playing field. Burdening financial companies that own banks, however small, more heavily than those that do not makes the entire financial services sector less stable.

In community banking the clear example of this imbalance is the credit union, which lacks the tax, community reinvestment, and other burdens imposed on commercial banks. For larger institutions one bete noire is the hedge fund.

The economy faces perils when the game is played on a hillside rather than the level green.

First, the tilt makes the heavily regulated companies less safe, pushing them out on the risk curve to compete. Less burdened competitors make fatter margins in the same businesses, so capital tends to favor them.

Second, the risk inherent in the less regulated companies does not disappear. (If it did, everybody should be less regulated.) Heavily regulated rivals and the public assume part of that risk.

In a recent speech to the Independent Community Bankers of America, Federal Reserve Chairman Alan Greenspan reiterated his view that large nonbank financial institutions should not have bank-like oversight. The markets scrutinize and discipline them adequately, he said, and nonbanks do not receive the benefits of the banking industry's safety net.

But there are serious deficiencies in the market's ability to monitor businesses. We see this in the many rating-agency errors, as well as the Enron and WorldCom debacles.

Furthermore, large nonbanks do benefit from a government safety net. …

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