We recently discussed Wal-Mart's (NYSE: WMT) aspirations to get into commercial banking. Tyler Cowen looks at the issues, and some of the complicating factors:
My take: Since the New Deal the United States has upheld a legal separation between banking and commerce. The banking sector receives deposit insurance and access to the Fed as lender of last resort, but is placed under special supervision and must meet capital requirements. You -- especially my libertarian readers -- may not like this deal but in the short-run, medium-run and perhaps the long-run as well, it is a fact.
As a first-cut approximation, this deal is for banks a tax in good times but a subsidy in bad times.
So what happens if you let banking and commerce blend too much? One danger is that you extend Fed subsidies to the commercial sector. Should we have to bail out banks because their commercial arms have gone under? (Don't expect too much of Chinese walls in a crisis.) What if GM had a bank and the whole concern went under next year? Widespread chicanery with pension funds is not reassuring in this regard.
A quite different danger is that the less-regulated commercial firms can outcompete banks. I suspect Wal-Mart is run much better than most banking firms, which don't seem to care much about customer service. But if enough deposits shift to the commercial sector, banks-as-we-know-them might drop like rotten apples. Creative destruction is all well and fine, but here the taxpayer is holding the bag. And if traditional banks approach extinction, they might take excess risk as their capitalization falls, as happened with many S&Ls in the 1980s.
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