The modern banking structure has been around for at least 700 years. And banks have been failing for 700 years.
From 1980 until the early 1990s, over 1,000 banks failed in the U.S. The simple reason why bank failures have been so persistent for so many centuries is that banks aren’t safe; not the way 21st-century Americans want them to be.
Lending to businesses and families is, by its nature, risky. Borrowing money from depositors to lend to others makes it even riskier. That’s what banks do, and no amount of regulation can ever make banks “safe” the way Americans want them to be.
But at some point in the early 21st century, Americans decided that they wanted their banks to be fortresses of safety that take no risks, and yet somehow still serve the needs of the community.
That’s not possible.
A truly safe bank is not a bank at all, but rather is a money warehouse. At a minimum, the difference between a money warehouse and a bank is that a bank pays you interest for your deposits, whereas a warehouse charges you to keep your deposits safe. No exceptions. Furthermore, banks make loans, warehouses don’t.
So why then do politicians continue to dangle the carrot of “safer banks through stricter regulation” in front of Americans, when they know that history has shown that no amount of regulation can stop bank failures? Why do politicians promise a banking system that’s as safe as a network of government-protected money warehouses, while telling Americans that they can still expect to receive typical banking services such as interest on deposits and personal loans?
The answer is because the political motives behind banking regulations never were about making banking safer for Americans.
They were always about making the financial sector more disposable to government. Americans were slow to recognize this in 2010, when new regulations were put in place promising to make the banking system safe forever.
My hope is that in 2023, Americans won’t make the same mistake again of believing that the path to safety is via greater government control of our entrepreneurial system.
Thomas Tzitzouris is director at New York City-based Strategas Research Partners. He lives in Rhode Island.
