Business Insider

If government gets out of the banking business, bankers will do their jobs

A decade ago, one of the worst financial crises this country has ever known got under way, as U.S. housing prices ended their upward trend and American financial institutions started booking large losses.

Since then, the American banking industry has consolidated significantly. Now the four largest banks control 43 percent of all commercial bank deposits, about $5.2 trillion. Laws have been put in place with the intention of preventing another crisis, and these large banks now are considered “too big to fail.”

What we should be learning from all this is the consequence of banks doing less. The banking industry, and particularly the larger banks, do less today in the real economy since they now face less competition and don’t have the responsibility of protecting depositors.

Today, there are 1,985 fewer banks, according to the Federal Deposit Insurance Corp. Deposits at those banks are up 50 percent, but loans and leases have grown by only 32 percent.

The FDIC reports that there are fewer banks in the Idaho and these institutions are lending less to the real economy. Direct lending by Idaho banks is now 65 percent of bank assets, compared with 73 percent in 2009.

With eight years of positive economic growth, banks should be willing to do more banking. Liquidity from deposits lowers the risks, and interest rates still are historically low.

Why do they hold back?

▪  The government still guarantees Fannie Mae and Freddie Mac, which leaves the risk in place for another housing bubble.

▪  Regulations give banks a strong incentive to buy government bonds rather than make private loans.

▪  Dodd-Frank legislation now codifies the too-big-to-fail issue.

When policymakers get the government out of the mortgage business and stops selling bonds to the banks, bankers will get back to business.

Peter Crabb is professor of finance and economics at Northwest Nazarene University.