How to Craft a 21st-Century Equality Bank

By Federal Financial Analytics

Reflecting a lot of questions and commentary, the American Banker last week published an op-ed by Karen Petrou showing how to build the bankers’ banks to solve at least some of our economic-inequality problems.  Many proposals seek to do so via the U.S. Postal Service, but an Equality Bank is at least as powerful and comes only from the private-sector.

In a prior blog post , we analyzed pending legislation to allow the USPS to offer payday loans and, indeed, a wide array of largely unrestricted, but risky retail financial services.  We noted there that a 21st-Century Equality Bank could step in a lot faster and better.  Here, we show how like-minded banks on their own or through a trade association or similar consortium could fire up an equality-finance powerhouse. 

As the op-ed notes, bankers’ banks were established in the 1980s to enhance small-bank competitiveness and have largely gone out of fashion.  The charter is nonetheless a potent one with  potential exemptions from costly capital or other prudential rules that curtail financial intermediation for low-and-moderate income households, start-up small businesses, and other communities now starved of safe, sound, sustainable financial options.

As we have noted in numerous blog posts such as this one from last month, regulated banks have left an open field for unregulated entities such as payday lenders because providing sound financial-intermediation products to higher-risk customers under stringent safety-and-soundness standards and current ultra-low rates is flat-out unprofitable.  Although bankers’ banks would rightly remain subject to consumer-protection requirements, they can and should be absolved of rules that are unduly costly for companies operating without deposit insurance or direct access to individual customers.  Unless a bankers’ bank becomes a behemoth – and wouldn’t that be nice – none would pose any risk to the FDIC or the rest of the U.S. or global financial system.  Many of these rules are premised on the “negative externalities” of bank risk – an equality-dedicated bankers’ bank instead creates a raft of positive externalities.

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