Interstate Banking and Product-Line Freedom: Would Broader Powers Have Helped The Banks?

OF THE U.S., various years; and manufacturing data are calculated frorm THE ECON. REP. OF THE PRESIDENT 391 (1991). 8. See ROBERT E. LrrAN, THE REVOLUTION IN U.S. FINANCE 11 (1991). The Yale Journal on Regulation readily traded on the open market). A much broader range of banks, however, have felt the sting of the second form of securitization: Wall Street's transformation of formerly illiquid loans into marketable securities collateralized by those loans. The second type of securitization was launched in the early 1970s by the federal housing agencies, which guaranteed or "credit enhanced" pools of residential mortgage loans. Since then, roughly $1 trillion in mortgages, or more than 35% of the total outstanding, have been transformed into securities. In recent years, consumer installment and credit card loans also have been turned into asset-backed securities, totalling about $80 billion at year end 1991.9 The mass production of credit has become the Trojan horse of the American banking system. While the liquefaction of credit has made it easier for banks (and thrifts) to shed their assets when they want to, it also has allowed pension funds, insurance companies, and mutual funds to enter the market for formerly illiquid credits. This has undermined much of what banks alone used to get compensated for: analyzing nonstandardized credits and then holding them in portfolio. As a result, yields on securitizable loans have been compressed by anywhere from 30 to 100 basis points on residential mortgages and by an unknown amount on consumer loans.' ° In short, during the 1980s similar competitive forces hit all banks and lowered distribution of profits across-the-board. By itself, however, this effect would not have attracted significant attention or concern from policymakers, few of whom have been especially protective of bank profits. The central reason that bank industry performance hit the political radar screen during the 1980s was that the left tail of the distribution of bank profits (or the percentage of banks that lost money and, in the worst case, became insolvent) became thicker and fatter. Thus, whereas in the 1970s virtually no banks failed and relatively few lost money, by the end of the 1980s, roughly 10% of all banks that started in the decade had failed and an additional 10% were still losing money." 9. Data from various issues of the Federal Reserve Bulletin (on file with author). 10. The 30 basis point estimate is found in PATRIC HENDERSHOTT & JAMES D. SHILLING, THE IMPACT OF THE AGENCIES ON CONVENTIONAL FIXED-RATE MORTGAGE YIELDS 10 (National Bureau of Economic Research Working Paper No. 2646, 1988). Others claim the'effect of securitization on residential mortgages rates is as large as 100 basis points. See JAMES ROSENTHAL & JUAN OCAMPO, SECURITIZATION OF CREDIT: INSIDE THE NEW TECHNOLOGY OF FINANCE 12 (1988). 11. See, e.g., FDIC QUARTERLY BANKING PROFILE, various issues. For the number of failures, see 1990 FDIC ANNUAL REPORT. Vol. 9: 521, 1992 Broader Banking Powers