Were banks ever boring?
Since the Financial Crisis many critics have called for a return to “boring banking”—by which they mean banks that are limited to taking deposits and making loans, restricted from nontraditional activities like securities underwriting, insurance, investments, and other activities that led up to the Great Recession. The implication is that if we could just restore the Glass-Steagall act, banks would be boring again and the world would be safe from greedy, reckless bankers once again.
The reality of the situation is quite different, however. Banking was boring in the ‘50s and ‘60s, in the shadow of the Depression-era regulations that severely limited them. But the inflation of the ‘60s and ‘70s necessitated reforms, which were enacted in the early ‘80s. At that time, banks began to significantly expand the number of non-traditional activities they undertook.
Source: NY Fed. Red line marks the repeal of Glass-Steagall.
This provided a diversified source of income to the bank holding companies, as well as providing certain operational synergies. It is interesting that banker pay and education, relative to the rest of the population, collapsed in the late ‘30s and early ‘40s, and recovered in the ‘80s and ‘90s to the level it was about 100 years ago. All these changes happened before the repeal of Glass-Steagall in 1999.
Finance has never been boring, but there was a period of time when it was constrained. These limitations didn’t eliminate financial threats to the economy, though. The Great Inflation of the ‘70s was just as disruptive and dangerous to the economy and markets as the Great Recession. It’s just that those financial errors were made by academics and policymakers, rather than by traders and hedge fund managers. The financial and economic world is different today than it was in the ‘50s and ‘60s. In a global, competitive landscape, finance has to be global and competitive.
A century ago, the great architect Louis Sullivan designed a series of “jewel box” banks across rural America. The buildings could have been inspired by Sullivan’s view of banking itself. They might have been small. But they weren’t boring.
Douglas R. Tengdin, CFA