of previous net lending by financial institutions. Not only did the lender change, so did the borrower. Funds which had previously been lent by banks are now lent by the commercial paper market, and these funds created a new source of consumer credit. In the quest for new business, banks greatly increased their portfolio of real estate loans, particularly in response to the Monetary Deposit Act and the Garn-St. Germain. 266 Furthermore, banks took on obligations to provide low profit margin guarantee underwriting facilities for the commercial paper market (such as RUFs and NIFS). Because finance companies were unregulated, and thus not subject to the costs of regulation, reserve requirements and deposit insurance premiums, they were able to capture and were in part responsible for the growing consumer credit market, and they were free riders of the underwriting facilities provided by banks. These circumstances would not have existed if finance companies were regulated as banks, which is functionally what they were. In order to regulate finance companies as banks within the current bank holding company restrictions, commercial companies would have to divest their holdings in such finance companies. However, they should be allowed to continue owning finance companies and making commercial loans that are incidental to their business (for example, GMAC should be able to make car loans).
Narrow banks answer some of the problems posed by the international movement toward securitization; but the Narrow Bank/FHC option will not induce most banks to move their assets out of insured depositories (where subject to certain write-downs, assets, particularly real estate, may be held at book value), at least in the short term. In the long term, narrow banks may be a viable option if their investing powers are better enumerated and inducements are offered to preserve small business lending (inside or outside the narrow bank); yet narrow banks, since they may be the only banks whose access to the discount window is viable, will still be exposed to risks posed by securities firms that require access to the payment system. Allowing full-scale underwriting by banks, without prudential limitation--at least an outright prohibition on lending to securities affiliates-- is ill-advised.