Should Wal-Mart be Allowed to Enter Commercial Banking?

"I don't know if Wal-Mart would be good or bad for banking in the long run. But I'll bet ATM fees would come down pretty quick."

Here is more detail.  Wal-Mart has applied for deposit insurance protection in the state of Utah, so it can open an industrial loan corporation.  Surprise, surprise, American banks don't like the idea.

My take: Since the New Deal the United States has upheld a legal separation between banking and commerce.  The banking sector receives deposit insurance and access to the Fed as lender of last resort, but is placed under special supervision and must meet capital requirements.  You -- especially my libertarian readers -- may not like this deal but in the short-run, medium-run and perhaps the long-run as well, it is a fact.

As a first-cut approximation, this deal is for banks a tax in good times but a subsidy in bad times.

So what happens if you let banking and commerce blend too much?  One danger is that you extend Fed subsidies to the commercial sector.  Should we have to bail out banks because their commercial arms have gone under?  (Don't expect too much of Chinese walls in a crisis.)  What if GM had a bank and the whole concern went under next year?  Widespread chicanery with pension funds is not reassuring in this regard.

A quite different danger is that the less-regulated commercial firms can outcompete  banks.  I suspect Wal-Mart is run much better than most banking firms, which don't seem to care much about customer service.  But if enough deposits shift to the commercial sector, banks-as-we-know-them might drop like rotten apples.  Creative destruction is all well and fine, but here the taxpayer is holding the bag.  And if traditional banks approach extinction, they might take excess risk as their capitalization falls, as happened with many S&Ls in the 1980s.

How far can we let commerce and banking mix?  The lending arms of automobile companies so far have worked fine.  The old "non-bank banks" -- most prominently Sears Roebuck -- did not create major troubles for the Fed, although banks hated the lesser regulated competition.  But somewhere along the line, enough stones add up to form a pile.

View one: Wal-Mart is a big enough stone to constitute a pile.  Don't let it happen.  Greenspan himself was skeptical of the ILC exemption.

View two: Wal-Mart in Utah is just one stone.  This reform will make customers better off, while keeping us on the safe side of the line.

View three: Letting Wal-Mart into banking will force other beneficial banking reforms, such as pricing deposit insurance for risk, or greater reliance on private insurance.

View four: All the worries are hogwash, full steam ahead.

Right now your risk-averse blogger is hovering between views one and two.  Stay tuned...