Regulation is clearly inadequate to keep these banks honest and ensure that they serve the public interest. The world's largest private banks have been caught in criminal acts that former bank fraud investigator Prof. William K. Black calls the greatest frauds in history. The litany of frauds involves more than a dozen felonies, including bid-rigging on municipal bond debt; colluding to rig interest rates on hundreds of trillions of dollars in mortgages, derivatives and other contracts; exposing investors to excessive risk; and engaging in multiple forms of mortgage fraud. According to US Attorney General Eric Holder, the guilty have gone unpunished because they are "too big to prosecute." If they are too big to prosecute, they are too big to regulate.
But that doesn't mean Congress won't try. Dodd-Frank gives the Federal Reserve "heightened prudential supervision" over "systemically important" banks, essentially putting them under government control. According to Hensarling, writing in the Wall Street Journal in July, Dodd-Frank is turning America's largest financial institutions into "functional utilities" and is delivering the power to allocate capital to political actors in Washington.
Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City, gave a speech in 2011 in which he also described banking as a "public utility." (What he actually said was, "You're a public utility, for crying out loud.") Six months later, Hoenig was appointed vice chairman of the FDIC.
If the megabanks are going to be true public utilities, they probably need to be publicly-owned entities, which capture profits and direct credit in a way that actually serves the people. If Dodd-Frank's several thousand pages of regulations cannot create a stable and sustainable banking system, the regulatory approach has failed. The whole system needs to be revamped.
Restoring Community Banking: The Model of North Dakota
Even if the megabanks were to become true public utilities, we would still need a thriving community banking sector. Community banks service local markets in a way that the megabanks with their standardized lending models are neither interested in nor capable of.
How can the community banks be preserved and nurtured? For some ideas, we can look to a state where they are still thriving -- North Dakota. In a September 2015 article titled "How One State Escaped Wall Street's Rule and Created a Banking System That's 83% Locally Owned," Stacy Mitchell writes that North Dakota's banking sector bears little resemblance to that of the rest of the country:
North Dakotans do not depend on Wall Street banks to decide the fate of their livelihoods and the future of their communities, and rely instead on locally owned banks and credit unions. With 89 small and mid-sized community banks and 38 credit unions, North Dakota has six times as many locally owned financial institutions per person as the rest of the nation. And these local banks and credit unions control a resounding 83 percent of deposits in the state -- more than twice the 30 percent market share that small and mid-sized financial institutions have nationally.
Their secret is the century-old Bank of North Dakota, the nation's only state-owned depository bank, which partners with and supports the state's local banks. In an April 2015 article titled "Is Dodd-Frank Killing Community Banks? The More Important Question is How to Save Them", Matt Stannard writes:
Public banks offer unique benefits to community banks, including collateralization of deposits, protection from poaching of customers by big banks, the creation of more successful deals, and . . . regulatory compliance. The Bank of North Dakota, the nation's only public bank, directly supports community banks and enables them to meet regulatory requirements such as asset to loan ratios and deposit to loan ratios. . . . [I]t keeps community banks solvent in other ways, lessening the impact of regulatory compliance on banks' bottom lines.
We know from FDIC data in 2009 that North Dakota had almost 16 banks per 100,000 people, the most in the country. A more important figure, however, is community banks' loan averages per capita, which was $12,000 in North Dakota, compared to only $3,000 nationally. . . . During the last decade, banks in North Dakota with less than $1 billion in assets have averaged a stunning 434 percent more small business lending than the national average.
The BND has also been very profitable for the state and its citizens. Over the last 21 years, the BND has generated almost $1 billion in profit and returned nearly $400 million to the state's general fund, where it is available to support education and other public services while reducing the tax burden on residents and businesses.
The partnership of a state-owned bank with local community banks is a proven alternative for maintaining the viability of local credit and banking services. Other states would do well to follow North Dakota's lead, not only to protect their local communities and local banks, but to bolster their revenues, escape Washington's noose, and provide a bail-in-proof depository for their public funds.
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