Should We Allow Banks to Play Regulator?
From guns to private prisons to the environment, banks are engaging in political activism by withholding services not because of profitability or risk, but in an apparent attempt to impose their policy preferences on the country. Reviewing the banks’ proffered justifications, it is clear they see themselves as acting where Congress should but won’t.
While a private company operating within a free market should generally be able to choose whom they do business with, banks do not operate within a truly free market. The politicization of commerce is not unique to banks, but their regime of government-granted privilege is.
Banks receive a number of unique public-policy benefits that insulate them from free-market competition. As our recent research shows, these privileges include (but are not limited to) barriers to entry, regulatory advantages over non-bank competitors, exclusive access to publicly provided services, and in some cases protection from outright failure.
This “regime of privilege” was put in place, for better or worse, because banks are considered essential to a functioning economy. We give them privileges in order to help them facilitate lawful commerce. We do not give them privileges to intentionally do the opposite and impede lawful commerce.
None of this is to say that banks should be forced to take on all comers.
Traditional factors like profit, loss, and safety and soundness can and should influence banks’ decisions. With some important exceptions, private actors should not be compelled to do business against their will.
So the problem is not banks’ efforts to force change, per se, but their use of powers granted to them that are justified to the American people for different and arguably antithetical reasons. It is not at all clear that Americans would support granting banks the powers and privileges they enjoy if it were widely understood that banks now use these powers to limit their options. To be fair, this dynamic isn’t entirely the banks’ fault — though banks have certainly played a role in many of these policy decisions — but it is nonetheless the position they are in.
So, what should be done?
An argument can be made that banks’ right to freedom of association can and should outweigh any other concerns. This line of thinking holds that even if banks’ government-granted privilege is problematic, they should still be allowed to withhold services for almost any reason, up to and including an effort to limit the options of the American people.
However, a strong argument can also be made that banks leveraging their privilege to engage in de facto regulation reflects an abuse of their privileged position and should not be tolerated, particularly when it runs counter to the very reasons they received the privilege in the first place.
If society finds the second argument more persuasive, there are several options policymakers can look at to address the problem. The most direct is also the least restrictive on banks’ freedom of association: Remove the privileges banks enjoy and make banking a truly free market. With no government privilege, there is no risk of misuse. However, for obvious reasons, this option may not be politically feasible at the current moment.
Less ambitiously, we could condition government privileges on a requirement that banks refrain from this type of behavior, while allowing banks to seek private alternatives such as private deposit insurance if they really want to play regulator.
Finally, we could leave the system unchanged with one important exception: Prohibit banks from using a desire to regulate as a criterion when deciding whether to provide their services to individuals or businesses. While this solution is the simplest and most politically feasible, it is also the harshest and most restrictive, and should thus not be undertaken lightly.
It is debatable whether banking must be different from other businesses, but our government policy has definitely made it so. That makes for a complicated situation and calls into question decisions that would otherwise be theirs to make. With more and more banks engaging in this type of behavior, it is time for the American people to consider what changes, if any, are appropriate.
Brian Knight is director of the Innovation and Governance Project and a senior research fellow with the Mercatus Center at George Mason University. Trace Mitchell is a research associate with the Mercatus Center.