Litan's What Should Banks Do?: A Review Essay

Abstract

a What Should Banks Do? a recent book by Robert E. Litan (1987), poses in its title a policy question that has been with us since banks were first chartered in the United States in the early nineteenth century. The American polity has always considered depository institutions-especially commercial banks-to be special. They have been seen as bastions of great economic and political power; they provide a common and important input (credit) for many enterprises and many household production units; they are at the center of the payments mechanism; and their deposits are an important means of wealth storage. Depository institutions have been-and continue to be-among the most heavily regulated entities in the U.S. economy. As the 1 980s come to a close, the title question of Litan's book is especially pertinent. At the beginning of the decade depository institutions-especially savings and loan associations and savings banks (collectively, thrifts) -experienced substantial deregulation. That experience alone would be expected to create turmoil and new winners and losers in a more competitive environment.' The rapidly improving technologies of information processing (computerization) and telecommunications-both of which are important inputs into banking services-have made it easier for financial institutions to enter new markets and to offer new services. This, in turn, has brought more financial institutions, depository and nondepository, into competition with each other. The same technologies have meant more international competition for U.S. financial institutions in both domestic and overseas markets. And the turmoil, compounded by inadequate policies (discussed below), severe sectorial recessions in agricultural and energy-related areas (especially in the Southwest), and a large overhang of reduced-value Third World country debt, has already created a severe strain on the federal insurance fund that guarantees deposits in most thrifts (the Federal Savings and Loan Insurance Corporation or FSLIC) and is likely to do so for the similar fund that insures deposits in commercial banks and some savings banks (the Federal Deposit Insurance Corporation or FDIC). At this time of writing in 1988, the Congress is seriously considering legislation that would substantially modify or eliminate the limitations on commercial banks' securities operations contained in the Glass-Steagall Act of 1933-another time of great turmoil in