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Report Finds Regulators are Limiting Banking Competition

several-banksRegulators are hindering much-needed competition in the banking industry and placing consumers and taxpayers at risk, according to a report released on Thursday from the Competitive Enterprise Institute (CEI) titled "A Bird in the Hand and No Banks in the Bush." Author, John Berlau, CEI senior fellow and author of the report also revealed that this lack of competition in banking furthers the same 'too-big-to-fail' rationale that led to past bank bailouts.

The report explains that firms become 'too-big-to-fail' when competition is not prevalent among new bank entries, and this doctrine that some firms must be bailed out to save the broader economy, is still the exception rather than the rule.

“Uber is shaking up transportation, Airbnb is turning upside down the lodging industry, but in financial services, regulators are essentially hanging a sign outside their windows stating, ‘No new banks need apply,’” said Berlau.

According to the report, five years following the Dodd-Frank financial reform, 'too-big-to-fail' banks are drowning in regulations. Within this same time period, regulators have only approved only one new bank. In contrast, before 2010, the Federal Deposit Insurance Corporation (FDIC) approved an average of 170 new banks per year.

“It is not just small startups that have been shut out of the financial market, but also innovative firms that have proven themselves in sectors from retailing to manufacturing,” the author noted. “Unlike virtually every other industrialized country, the U.S. effectively bans non-financial corporations from owning bank affiliates. This means the best-run American corporations, with expertise in areas important to banking like technology and supply-chain management, are locked out of the banking industry.”

Berlau credits Dodd-Frank as well as pre-Obama regulations that “artificially keep banks too big by encouraging mergers, preventing new banks from opening, and preventing the formation of new, innovative banking arrangements.”

In order to really solve the 'too-big-to-fail' issue, Berlau says that the financial services industry need to broaden their horizons by allowing new entrants that can bring the technology and management expertise of both startup businesses and leading American firms to the banking field. This will not only expand competition, but also help bring stability, innovation, and choice to this industry.

“This lack of new bank competitors is one important reason why a large bank failure could severely curtail the supply of credit and availability of financial services,” said Berlau. “That in turn sets the stage for a continuing cycle of bailouts. It is time to bring what the great economist Joseph Schumpeter called “creative destruction” to the banking industry, by bringing in the competition from new entrants that exists in every other industry. There’s no banks like new banks”

Reforms suggested in the report include:

  • Congress should put procedures in place for approving new banks, in which regulatory agencies would have a specified time limit to approve or deny new bank applications.
  • Regulatory agencies should be required to give Congress and the public detailed explanations when those deadlines are missed.
  • Congress should repeal the Bank Holding Company Acts of 1956 and 1970 that put outdated and harmful restrictions on the separation of banking and commerce.
  • Congress should repeal provisions of Dodd-Frank, such as the Volcker Rule, that force Main Street banks to sell off financial instruments they use to hedge the risks of everyday activities, like lending.

Click here to view the Competitive Enterprise Institute's complete report.

About Author: Xhevrije West

Xhevrije West is a writer and editor based in Dallas, Texas. She has worked for a number of publications including The Syracuse New Times, Dallas Flow Magazine, and Bellwethr Magazine. She completed her Bachelors at Alcorn State University and went on to complete her Masters at Syracuse University.
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