Banking: Real Risks Require Real Reforms

Abstract

Unfortunately for healthy banks and taxpayers, Washington and the banking industry itself seem to be suffering from chronic denial that a massive problem exists. Federal banking regulators continue to minimize the number of banks that must be closed, pinning their hopes on a much delayed economic recovery or upon the magical powers of deregulation, and eerily replaying the behavior of savings-and-loan regulators a decade ago. Yet, regulators are not alone in repeating the steps taken in the savings-and-loan minuet. The banking lobby itself is closing ranks around its weaker members, sacrificing the interests of its larger constituency healthy bank holding companies in a vain and doomed attempt to prolong the lives of the industry's crippled giants. We called our recently published book Banking on the Brink not only because we identified nearly 2,000 banks on the brink of failure, restructuring or merger, but also because we believe that the industry stands on the brink of radical change. It is being transformed by both fierce competition from non-banks and the technological revolution sweeping through the world's capital markets.