Is It Time for a Better U.S. Banking System?

Perhaps more than any other framer / Founding Father, Hamilton, who started the Bank of new York (BK), foresaw the age when industrialists -- not the monarchy or the clergy -- would structure society, and he wanted a healthy banking sector to buttress it.

But with a banking sector that seemingly cycles from reticence to lend, lending at prohibitive interest rates, and outright banker-to-banker mistrust (the latest round of which is being driven by renewed concern about Italy's debt), is today's U.S. banking sector where Hamilton wanted it to be?   

Hardly.

Banking in the U.S. today is more about "sexy banking" -- prime brokerage (services to hedge funds and other investment funds), private banking (services to high-net-worth individuals), and "quants" (proprietary, in-house trading strategies) than it is about providing capital for new business formation and credit lines for small businesses.

Moreover, the above is all well and good, just as long as the loss from any of the aforementioned operations is not on the public's dime.

In other words, at least as it relates to Federal Deposit Insurance Corporation (FDIC)-insured operations, is it time to make banking boring again?

Well, given the infancy of Occupy Wall Street -- it's too soon to tell if the coalition that seeks economic and fiscal reform will gain critical-mass support from the American people -- the initial analysis suggests the United States may be ripe for modest, but not epoch-altering changes in the bank sector.

Modest Change vs Big Change

Modest change would involve tighter regulation of banks regarding their use of derivatives, trading practices, and the type of mortgages banks offer, among other reforms.

Epoch-altering change would be "big change" -- known as non-incremental change in political science circles.

The latter would involve "making banking boring again" -- as in putting tight controls on FDIC-insured bank functions.

Example: limiting the type of mortgage investments, then limiting the amount of interest the bank could charge to attract money to fund those investments.

A Return to "3-6-3 Banking"

This would be a return to the old "3-6-3" banking system. As in, "Pay 3 percent on deposits, charge 6 percent interest on mortgages, golf at 3 p.m."

Yes, banking would become boring again, some will complain. But maybe that's what at least a portion of the banking sector should have always been. The phrase "portion of the banking sector" is used because one difference regarding the new 3-6-3 banking compared to the old 3-6-3 banking is that there still would be investment banks.

Underscoring: investment banks and other private sector banks would still exist, with one, big condition: they would not be insured by the FDIC.

The new 3-6-3 banks would have a limited product line and mission -- but their deposits would be FDIC-insured.

And the reason is obvious enough: it's perfectly acceptable for a bank to leverage at a high rate, deploy complex trading systems, loan to risky hedge funds...just as long as they jeopardize investors' money -- not U.S. taxpayers.'

A Return to Boring Banking -- The Only Prudent Option for Nation?

In other worlds, via making banking boring again, the new 3-6-3 banking -- the era of, "Heads the banks win and make huge profits, tails the taxpayer pays" would be over.

The 3-6-3 banks will help return banking to its original mission: providing capital for companies in the real economy (manufacturing and services, except financial services), funding start-up companies/small businesses, and originating prudent, transparent residential mortgages.

Also, bank employee salaries would be modest -- and there would be no $1 million bank executives or other layers of bank excess and waste at the 3-6-3 banks.

In a nutshell, the 3-6-3 banks would serve the banking needs of the people and communities, not shareholders, executives or big-money clients, as the uninsured banks would continue to do.

Further, those clients/customers who want sophisticated exotic bank services, prime brokerage and/or higher returns on their deposits can deposit money in a non-insured, private sector bank.

Boring banking will never be as sexy as investment banking, but it will ensure that we'll still have a functioning banking system.