When a bank fails, it’s like part of the electric grid going down
Congress originally set up our banking laws along public utility principles. Banks were chartered to meet the deposit needs of the community, subject to strict limits on the sorts of activities they could engage in. Critically, they were the only entities permitted to provide households and businesses with cash equivalents such as checking and savings accounts.
Although there have been no catastrophic financial meltdowns since Lehman, the resulting stability is illusory: It rests on the government’s willingness to do whatever it takes to prop up both banks and non-bank financial firms.As a result, too-big-to-fail banks keep expanding. Financial firms profit from public sector bailouts. And asset prices outpace economic growth, exacerbating the housing affordability crisis.
Second, it would separate depository banking from dealing or speculating in securities and financial derivatives. Wall Street investment firms would have to stand on their own feet. If they took too many risks, they could go through bankruptcy without jeopardizing the rest of the financial system — or the economy.
Third, non-bank financial institutions such as Lehman would be prohibited from financing their operations with cash equivalents. Non-banks shouldn’t be allowed to issue deposits by another name.Finally, everyone who wants a bank account would be able to get one without worrying about being hit by predatory fees and without having to pay to transfer their money quickly.
Often, the most salutary legislation is passed in the wake of a crisis. But we need not wait until conditions deteriorate further to start building a more stable, more reliable banking system.The Washington Post accepts opinion articles on any topic. We welcome submissions on local, national and international issues. We publish work that varies in length and format, including multimedia.
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