Banks as Distinct from Other Types of Corporations

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Executive Summary

Banks have long been considered different from other types of corporations.
They have been assumed to have a public service function that has been increasingly eroded from earlier years.

Introduction

Banks exist because of governments (or in ancient times temples, which were also supported by and connected to governments). Banks without the support of governments have a very poor history.

This is explained in the following quotation.

Many continued to advocate that banks were distinct from other corporate entities because of their dependence on the government. Amidst the debate, Gerald Corrigan, president of the Federal Reserve Bank of New York, addressed this question head-on in a 1982 essay titled “Are Banks Special?” The fact that the question needed to be asked reveals how significantly the world of banking had changed in the prior decade. Corrigan answered the question in the affirmative and stated that:Banks and bank regulators have long since recognized the importance of banks acting in ways that preserve public confidence.… Deposit insurance and direct access to the lender of last resort are uniquely available to banks to reinforce that public confidence. Indeed, deposit insurance and access to the lender of last resort constitute a public safety net under the deposit taking function of banks. The presence of this public safety net reflects a long-standing consensus that banking functions are essential to a healthy economy. However the presence of the public safety net uniquely available to a particular class of institutions also implies that those institutions have unique public responsibilities and may therefore be subject to implicit codes of conduct or explicit regulations that do not fall on other institutions. Corrigan’s view was in line with the history of banking, but it was out of sync in the 1980s, and he lost this ideological battle. A study released by the Federal Deposit Insurance Corporation (FDIC) titled “Mandate for Change: Restructuring the Banking Industry” illustrates the logic of the winning argument. The FDIC proposed that the Glass-Steagall restrictions and the BHCA “be abolished” in order to allow banks the “freedom to operate in the marketplace without undue regulatory influence.” And the FDIC responded to the “specialness” of banks due to government support by indicating that FDIC insurance would be priced more “efficiently” as banks became “subjected to greater market discipline through the refining of failure-resolution policies.” In other words, FDIC insurance was only a “subsidy” if it was underpriced, and therefore, it was possible to find an accurate market price for this government support.

Source: How the Other Half Banks

https://www.amazon.com/How-Other-Half-Banks-Exploitation/dp/0674286065

The Great Depression Leads Brandeis to Recommend Nationalizing the Banks

The private banks were so disinterested in serving the public interest during the Great Depression that Louis Brandeis recommend nationalizing the banks. This is explained in the following quotation.

In addition to recommending conflict-of-interest legislation that would deter banker directorships, Brandeis suggested a more fundamental solution—turning banks into public utilities. Comparing them to the country’s railways, then an essential utility of commerce, he argued that banks should be treated not as private business but as a public service: “The dependence of commerce and industry upon bank deposits, as the common reservoir of quick capital is so complete, that deposit banking should be recognized as one of the businesses ‘affected with a public interest.’ ” Brandeis was drawing not only from a century of American history that supported his proposition but on like-minded policymakers like Senator Robert Owen, chairman of the Committee on Banking and Currency, who Brandeis quoted in his treatise: “My own judgment is that a bank is a public-utility institution and cannot be treated as a private affair, for the simple reason that the public is invited, under the safeguards of the government, to deposit its money with the bank, and the public has a right to have its interests safeguarded through organized authorities.

Source: How the Other Half Banks

While banks have this safety net, in the modern era they have come to take their safety nets for granted, knowing that no matter how badly they behave and how irresponsible they are, the government will bail them out.