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E-MailLev Menand is an Associate Professor of Law at Columbia Law School, and Morgan Ricks is the Herman O. Loewenstein Chair in Law at Vanderbilt University Law School. This post is based on their recent paper.
The unexpected failure of several major banks earlier this year has sparked interest in Washington in financial reform. The Biden Administration has recommended new ways to hold bank executives accountable when their institutions fail, stricter capital and liquidity requirements, new stress testing rules, and stronger long-term debt mandates. Other policymakers and commentators (including us) have highlighted the role played by the deposit insurance framework in enabling the run on SVB and setting off a massive deposit drain at smaller banks. More systemic reform ideas are also circulating, including fundamental changes to bank governance and government regulation and supervision.
What is missing from the debate is a framework for understanding how these various modifications fit together with each other and with the existing legal edifice for money and banking. The deposit insurance debate is a case in point. One side sees value in having large quantities of uninsured deposits. At most minor adjustments are needed, they contend, perhaps a way to insure certain business deposits used for payroll. Another group proposes a much more expansive change in deposit insurance, which would eliminate traditional bank runs entirely. It is difficult, however, to evaluate the relative merits of these positions without understanding how they would affect the rest of the system. Our monetary architecture is an interconnected set of networks: changes in one area ramify, leading to responses in others. For example, the decision to design deposit insurance primarily for households is part of the reason a range of highly unstable shadow money instruments, including money market funds and repos, emerged in the second half of the twentieth century. The rise of these instruments is part of the reason policymakers facilitated greater banking system concentration and conglomeration. The emergence of complex universal banks, in turn, is part of the reason policymakers turned to gameable bright line capital rules and watered down discretionary bank supervision.
From our fragmented debate and patchwork approach to policymaking it may be hard to see how the dots connect. In a new paper, Rebuilding Banking Law: Banks as Public Utilities, we offer a comprehensive plan for banking reform. We call our plan a New National Banking system (NNB). The NNB is part restoration, part innovation. It aims to renew the public utility banking law framework that undergirded American prosperity in the twentieth century and refine it by improving access to bank services and carrying through on the law’s public utility vision where previous policymakers came up short.
Our proposal allows aims to illuminate better the dynamic effects of the various incremental proposals currently under consideration. Changes to the corporate powers and activities of banks, governance of balance sheets, constraints on ownership and control, and duties to the public that treat bank money creation more as a public function that is outsourced according to traditional public utility norms will likely be self-reinforcing across domains. Take deposit insurance. Were policymakers to uncap deposit insurance they would move the country closer to the public utility approach as regards corporate powers and activities. In turn, this shift would augur further changes to how banks are regulated and supervised, what fees they owe to the government, how deposit interest rates are set, and what sort of obligations they should be subject to when it comes to providing payment services in their communities.
We believe that changes that would shift our banking laws toward treating banks more as public utilities would have a broad range of substantial benefits. And we think that our full-fledged proposal offers something for almost everyone—with aspects that should appeal to both the left and right, community and regional banks, nonfinancial businesses, and consumer groups. Often the most salutary legislation has passed in the midst of or wake of a crisis. But we need not wait until economic and financial conditions deteriorate further to start pressing forward. In this sense, the current turmoil offers a chance to begin.
The full paper is available here. A shorter version, geared toward a policy audience, is available here.
