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Does “Too Big to Fail” Mean “Too Big to Compete?”

In these languid days of the summer one story has flown below the radar this week. The Dodd-FrankWall Street reform law contained a little-known provision that placed a three-year moratorium on commercial businesses starting up banking affiliates. That moratorium quietly expired this week.

Since the moratorium was statutory it will require an act of Congress to extend it. That assumes that regulators like the Consumer Financial Protection Bureau, also a creation of Dodd-Frank, play honestly in the regulatory sandbox and don’t attempt to extend the moratorium by fiat.

There are good reasons to let the moratorium die. As John Berlau and Kyle Tassinariwrite in the Wall Street Journal, most other developed countries have no wall between banking and commerce, and seem to do OK when it comes to banking stability and soundness. Britain-based retailer Tesco operates a bank that has nearly $9 billion in outstanding mortgages and other loans that they’ve made to the public. A large percentage of credit card transactions are made on cards issued by Tesco Bank. The bank also controls a large percentage of ATM cash withdrawals in Britain.

Allowing commercial companies to enter the banking arena also provides more options for consumers and more competition. Competition helps companies step up their game, and that benefits everybody. From 2007 through 2008 over 100 U.S. banks, thrifts and other financial institutions went belly-up. We could use some new blood in the industry to replace them, and, frankly, to add some new DNA to the banking gene pool.
Opponents of this change will say that commercial entities can’t be trusted with your money. But the fact is that retailers large and small have been providing banking services for some time, and doing it in a stable, responsible manner.  Wal-Mart, for example, was blocked here from offering banking services, but currently operates a full-service bank in Mexico. Companies that sell big-ticket items, like Harley-Davidsonand Toyota, have provided credit to their customers for years in a sound, responsible manner.

Perhaps the biggest reason that argues in favor of commercially operated banks is the opportunity to further spread the risk of financial failure. The U.S. now has a huge bureaucracy designed to prevent the failure of large, global money-center banks operating here. If one or two of them failed, the result in terms of constrained credit and financial services could be catastrophic. However, that risk would be mitigated by being spread over more institutions, including those created by responsible commercial entities.

For years regulators ignored the looming threat posed by a sub-prime mortgage business that everyone nodded their heads at, but few really understood in terms of potential risk. Maybe they were too concerned at the time with the red herring of keeping banking and commerce separate.

Well, the recession is over, but credit is still hard to come by. “Too big to fail” remains the bogey. And regulation of financial services hasn’t made life easier for consumers. Maybe it’s time to take a look at the Wal-Mart and Tesco models and try the third rail.