Strong Managers, Weak Owners: The Political Roots of American Corporate Finance

By Mark J. Roe | Go to book overview

CHAPTER 12
A Small Comparative Test
of the Political Theory

COULD American firms and intermediaries imitate the German or Japanese structures without violating basic financial laws?

The disparity in size is central. The numbers show that large American banks play a role in the American economy equal to only one-quarter of the role played by large banks in Germany and Japan.1 It is not so much that the United States relies less on intermediaries as that its largest intermediaries are not very big. This difference in size correlates with law. American legal restrictions have historically kept American banks small and weak, by banning them from operating nationally; from entering commerce; from affiliating with investment banks, equity mutual funds, or insurers; and from coordinating stockholdings with these other intermediaries.

The National Bank Act of 1863 confined national banks to a single location, and the McFadden Act of 1927 only allowed branches of national banks to the extent state law permitted. Although states may permit out-of-state banks to open local branches (or affiliate with in-state banks via holding companies), until recently they did not. Although federal law could override state law and permit interstate branching, for the country's first two hundred years it has not. The United States still lacks a truly national banking system like that of most other nations.

American banks have also faced product limits. The Glass-Steagall Act historically denied banks a securities business and close affiliation with investment banks and, until recently, mutual funds. The Bank Holding Company Act prohibits affiliation with insurers and fine-tunes Glass-Steagall by prohibiting bank ownership affiliation with nonbanks except passive ownership of no more than 5 percent of a nonbank's stock.

Many of these rules are now eroding: Bank sponsorship of mutual funds, historically banned and only recently accommodated under banking law, is growing, despite its cloudy legality.2 Congress seems poised in the mid1990s to allow nationwide bank branching. Even with legal erosion, the

____________________
1
See supra chapter 11, tables 9 and 10.
2
Leslie Wayne, Questions on Bank Sales of Funds, N.Y. Times, Dec. 31, 1992, at C1; Prospectus for Vista Capital Growth Fund 8 (Feb. 28, 1992) (prospectus of equity mutual fund sponsored by Chase Manhattan Bank concedes cloudy legality under Glass-Steagall of bank sponsorship).

-187-

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