Mike O'Donnell | Jun. 11, 2018

To Regulate or Not to Regulate Banks? That is the Question.

Given that the U.S. economy is the strongest in the world, you might expect that the U.S. banking system would be very sophisticated and efficient, the result of some thoughtful grand design.
But it isn’t.

It is the result of a long history of crises, scandals, egos, power struggles, madding special interests, and nonsensical compromises. With three overlapping federal bank regulators, and legions of securities, insurance and state bank regulators, the U.S. banking system is THE most highly regulated and THE least efficient in the world.

It is hard to pinpoint exactly how many individual regulators are out there, but as best I can tell, there appear to be seven or eight regulators for every bank. This means, I imagine, that when a bank merges or closes, the regulators are quite happy because they can re-focus all the more energy on micro-managing the remaining banks.

The start of the banking industry in the U.S. dates back to when Alexander Hamilton, after reading the “Wealth of Nations,” became convinced of the need for a central bank that would guide and help build America into a world power. He wrote to Robert Morris, the then superintendent of finance for the continental congress, sharing this vision and as a direct result Robert Morris created the Bank of North America, which helped secure financing for the Revolutionary War.

When Hamilton became the first Treasury secretary in 1790, he convinced Congress to charter a U.S. national bank whose principal role was to help establish public credit.

Congress ended up revoking this charter in 1811 on the grounds that it had an unfair competitive advantage over the many state banks that then existed (lobbying was a fine art back then too) but changed its mind the next year because of the war of 1812 and a new nationally chartered bank was created and existed until 1832 when President Jackson, who viewed it as a “monster,” vetoed its renewal by both the House and Senate.

There followed a period of “free banking” and by the time of the War Between the States, there were thousands of state banks in existence, each issuing their own unique currencies and doing their own thing, until President Lincoln’s administration approved the creation of the “greenback” as legal tender for the U.S. and all the different state bank notes ended up being taxed out of existence. 

The history of U.S. banking between then and today is one full of different government rules and regulations that helped shape where we are in 2018. For decades, and at the turn of the 20th Century, the big debate was whether or not banks could have branches. Then the Federal Reserve was created in 1913 to do a task ostensibly that the Department of Treasury was charged to do, and these two competing regulatory agencies co-existed uneasily until a virtual peace accord was signed after WW2.

During the 50’s, 60’s, and 70’s, there was the 3 – 6 – 3 rule: bankers borrowed money at 3%, lent them back out at 6%, and were able to get to the golf course by 3 pm because they had nothing else to do. Banking was simple and predictable with the regulators setting all the rules.

Crises came, and crises went, most of them caused by the unintended consequences of government regulation, like the savings and loan scandal from 1986 through 1995, which ended up costing taxpayers $132.1 billion. 

The traditional banking model of taking deposits from savers, paying them a low interest rate and then earning a profit by lending those funds out at a higher interest rate, has fundamentally changed over the decades. Banking is not what it once was.

Less than half of the profits of JP Morgan Chase come from those traditional activities these days. Fees account for about a third of their revenues and investment banking the balance.

More than half of all home mortgages in the U.S. are now processed outside the banking industry.

Technology has created lots of competitors and many alternatives to the traditional banking model, with more options seemingly available every day.

The primary effect of bank regulation is to create barriers to entry around new bank formation and to make it harder for smaller banks to exist, allowing the bigger banks to keep getting bigger.

If the massive amount of resources devoted to regulating an increasingly concentrated industry was diverted to ensure that everyone in the U.S. was financially literate (i.e. better educating the citizenry, hint, hint) there would be ABSOLUTELY NO REASON WHATSOEVER for bank regulation today. A much better use of our limited resources would be to help people gain a fundamental understanding of how to manage money. This would allow people to protect themselves from unscrupulous lending practices rather than having bank regulators try to protect people from themselves, which causes more confusion, conflict and crisis down the road.

So, if you will join me in encouraging everyone you know, young and old, to be financially literate, and if everyone else did the same, we would ALL be much better off and fewer of the people who can least afford to do so would be using pay-day lenders or other expensive forms of moving funds around.

Do we need any bank regulation? Absolutely not.


There are many incredible resources out there that help educate both the young and old on financial literacy. We help support a few of those organizations that include mpowered, Junior Achievement, Economic Literacy Colorado, and the Young Americans Center for Financial Education by sponsoring events, board participation, and volunteering.