The S&L Debacle

This speech was given by Professor White as part of the annual Financial Institutions and Regulation Symposium at the Fordham University School of La

The Community Reinvestment Act: Good Intentions Headed in the Wrong Direction

The Community Reinvestment Act of 1977 (“CRA” or “the Act”) places an obligation on commercial banks and savings and loan associations (“S&Ls”) and savings banks (together with S&Ls, frequently described as “thrifts”) to meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions. The Act offers no greater precision for these phrases, and the task of fleshing them out and enforcing them has been left to the bank and thrift regulatory agencies. This article argues that the CRA approach is fundamentally flawed. It is either redundant (because serving the local community is profitable anyway) or require cross-subsidization from other services with above-normal profits

Technological Change, Financial Innovation, and Financial Regulation: The Challenges for Public Policy

The two technologies that form the heart of the financial services industry—data processing and telecommunications—have experienced rapid improvement and innovation in the United States in the past few decades. In the heavily regulated financial services industry, technological innovation and improvement may pose significant problems and challenges, both for the industry itself and for the government regulators and public policy makers. In this paper, the author provides an overview of the interactions between financial innovation and regulation. The author first makes a distinction among types of financial services firms that is essential to an understanding of financial services regulation. Institutions such as banks and insurance companies that hold financial assets and issue liabilities are known as financial intermediaries. A company that extends trade credit to its customers acts as a lender and is therefore a financial intermediary. The second category of financial services firms comprises firms like stockbrokers and investment bankers who facilitate financial transactions between primary issuers of financial liabilities and the investors who purchase these instruments. These firms are known as financial facilitators. Although there are firms that act both as intermediaries and facilitators, the distinction is an important one in understanding the interaction between technological innovation and financial regulation in the U.S. The author next turns to an analysis of the four major underlying causes of the recent technological changes in financial services. First, data processing and telecommunications have become both more powerful and inexpensive, allowing improved data collection, risk assessment and wider geographical reach for products. Second, less restrictive and protectionist laws and regulations have paved the way for greater competition and allowed outside innovators to enter the financial services market. Third, the shift from a relatively stable to a risky economy beginning in the 1970s created a demand for futures and options that would protect investors from risk. Finally, as a reaction to a strict regulatory environment, financial institutions developed innovative ways to circumvent cumbersome regulations. One of these developments, for example, was the money market mutual fund. Recent easing of restrictions has also encouraged financial innovation. The author turns to a detailed discussion of financial regulation, explaining the distinctions between the three major categories of: 1) economic regulation; 2) health-safety-environment regulation and; 3) information regulation. He then covers the specifics of regulations affecting: 1) banking; 2) securities and related instruments; 3) insurance; 4) pension funds; 5) mortgage conduits and; 6) finance companies and leasing companies. He then reaches the following conclusions based on his evaluation of the environment within which financial regulation operates: 1) the widespread nature of financial regulation is not accidental; 2) of the three categories enumerated above, information regulation extends most widely across the financial sector; 3) safety regulation applies most directly and strongly to those financial intermediaries who have the most widespread liabilities and; 4) economic regulation applies most extensively to banks and other depositories. He next explores the interaction between innovation and regulation and concludes that regulation has both negative and positive effects on innovation, this determination particularly depending on the critic's perspective on the regulations. The main effects of innovation on regulation now and in the future should involve the following issues: 1) more federal centralization of regulation, and less state regulation; 2) more international markets for financial products; 3) greater efficiency of financial markets due to increased competition; 4) development of regulations for new financial instruments; 5) differential regulatory treatment of risky financial instruments and; 6) stored value cards and smart cards and other electronic based innovations; 7) new privacy policies resulting from increased gathering of personal information from electronics-based instruments; 8) increased flows of funds through EFT systems and; 9) new interactions between computer software and hardware as well as with outside institutions as financial services transactions depend more on electronics-based instruments. The author concludes that a major task of public policy must be to ensure that financial regulation does not stifle innovation while it responds appropriately to challenges posed. This paper was presented at the Financial Institutions Center's conference on Performance of Financial Institutions, May 8-10, 1997.

The Residential Real Estate Brokerage Industry: What Would More Vigorous Competition Look Like?

The residential real estate brokerage industry represents a troubling instance of false appearances. Though the numbers of sales agents and brokerage firms, plus easy entry, would appear to offer the promise of vigorous competition, actual practices in the industry have caused reality to fall substantially short of the potential. After recounting the history of the transition of the securities industry from fixed and non-competitive stock brokerage commissions to far more vigorous competition, I draw on that experience to describe what vigorous competition in the residential real estate brokerage industry would look like. I also suggest public policy measures that would help bring about more vigorous competition.

Should Wal-Mart, Real Estate Brokers, and Banks Be in Bed Together? A Principle-Based Approach to the Issues of the Separation of Banking and Commerce

The application in July 2005 by Wal-Mart to obtain a specialized bank charter from the state of Utah and to obtain federal deposit insurance re-opened a national debate concerning the separation of banking and commerce. Simultaneously, bank regulators were considering the possibility of allowing banks to enter the area of residential real estate brokerage, which is another facet of the same set of issues. Though Wal-Mart withdrew its application in March 2007, the issues and the debate continue. This paper offers a principles-based approach to these issues that begins with the recognition that banks are special and that safety-and-soundness regulation of banks is therefore warranted. Building on that recognition, the paper lays out the principle that the 'examinability and supervisability' of an activity should determine if it should be undertaken by a bank or by a bank's owners. Even if an otherwise legitimate activity is not suitable for a bank, it should be allowed for a bank's owners (whether the owners are individuals or a holding company), so long as the financial transactions between the bank and its owners are closely monitored by bank regulators. The implications of this set of ideas for the Wal-Mart case, for real estate brokerage, and for banking and commerce generally are then discussed.