A Proposal for a Stable and Reliable Banking System

It has been 15 years since Lehman Brothers collapsed and caused a financial panic that turned a mild recession into a great one. Despite this, the American financial system still relies on government rescues to prevent catastrophic meltdowns. There is a better solution: separating depository banks from other financial businesses and treating them as public utilities.

Depository banks, which include commercial banks, thrifts, and credit unions, provide a crucial public service by issuing and circulating deposit money. These balances amount to over $17 trillion and are relied upon by individuals and businesses to carry out their daily transactions. However, the current banking system lacks the stability and accessibility required for a public utility.

Congress initially established banking laws with public utility principles in mind. Banks were chartered to meet the deposit needs of the community while adhering to strict limits on their activities. However, in recent decades, deregulation has weakened these provisions and allowed non-bank financial firms like Lehman to engage in banking activities without complying with the same regulations.

Although measures were taken to enhance financial stability after the Lehman collapse, such as the Dodd-Frank Act of 2010, there is a need for more fundamental structural reform. The federal government has intervened multiple times this decade to prevent financial collapses and prop up both banks and non-bank financial firms. This reliance on government support creates a false sense of stability and allows too-big-to-fail banks to continue expanding.

A 21st-century public utility approach to banking is required to break this cycle. Firstly, there should be reinstated limits on bank powers to prevent high-risk speculation and improve regulatory oversight. Secondly, depository banking should be separated from dealing or speculating in securities and financial derivatives, ensuring that Wall Street investment firms bear the consequences of their own risks. Thirdly, non-bank financial institutions should be prohibited from financing their operations with cash equivalents, as they should not be allowed to issue deposits under a different name.

Lastly, the government should ensure that everyone has access to a bank account without worrying about predatory fees or expensive transfers. By standing behind deposit accounts, the government can establish the terms on which banks offer services, embodying the same principles used for other public utilities.

Waiting for a crisis to pass should not be the only incentive for enacting beneficial legislation. Building a more stable and reliable banking system is a crucial step to prevent future financial calamities.