Can We Redraw a Distinction?

It is easy to get confused about banks.  It’s not just that one word is being applied to a huge range of organizations, but legal distinctions have been abolished or blurred as well, adding to the confusion.

I am sure many, like me, remember neighborhood banks.  In the days before “relationship managers” we may even have known people who worked in one.  On the other hand, the names of the big investment banks J.P.  Morgan and Lehman Brothers were also familiar, though from a different world.  Congress firmed up the distinction in the wake of the financial collapse of 1929-1931, providing deposit insurance for customers of local banks after a disastrous rash of bank failures in which many lost their savings.

Financial deregulation in the 1990’s abolished the firewall between the two, and then in last year’s “great panic,” the Fed allowed the giant investment banks to become like the others, so they could gain access to federal credit.   Now they are all the same – except, of course, they’re not.

Robert Wilmers, Chairman and CEO of M&T bank, reminded us recently in The Wall Street Journal of the distinction:  “five firms have swung from an aggregate loss of $14.0 billion in 2008 to $30.1 billion of net income through September 2009. The remainder of the industry, which earned $4.4 billion in 2008, is now showing $9.7 billion in red ink through this year’s third quarter.”  This is the difference between banks that focus primarily on trading and those that “serve the public,” as Wilmers put it.

He added: “These large institutions operate in a different world than that of traditional, community-oriented banks,” and suggested Congress “should consider requiring that financial institutions account separately for their trading and their traditional banking businesses, so the public can see what’s going on.”   (See, “Not All Banks Aree Created Alike.”)

We probably can’t put humpty-dumpty back together again, but it is not just a matter of guarding against a banking system that is bloated and out of control.  It is also about restoring some common sense distinctions in the mind of the public.  We make sense of the world through the categories we use, and the category of “bank” has lost much of the meaning it had.  As things stand, we will continue to be suspicious and bewildered by the banking brands that compete for our attention and trust.

It’s not that our “community-oriented banks” have been blameless, by any means.  They were pushing sub-prime mortgages like everyone else, and extending home equity loans without adequate regard for the ability of lenders to pay.  But at least we stood the chance of understanding how they worked.