Bank Reform Debate Continues Even as Recovery Continues

It’s not surprising that former Fed Chairman Paul Volcker has voiced the opinion that banking reform must include the break-up of large institutions, including the separation of commercial and investment banking operations. However, having John S. Reed’s voice join the same chorus is really reason for pause.

Paul Volcker’s regime as Fed Chairman was strikingly different from that of his successor, Alan Greenspan. Volcker did not consider himself the cheerleader-in-chief for the growth economy, and his greatest achievement was in helping to finally choke off the inflation trend which had snowballed in the 1960s and 1970s. Volcker was willing to fight inflation even at the expense of some short-term economic growth, and it paid off in the long run. Given this conservative approach, his view in favor of unhooking conservative and risky lines of bank business is perfectly in character.

Reed, on the other hand, is one of the founding fathers of the modern mega-bank, having merged his Citicorp with Travelers to form Citigroup. Now, however, Reed has stated that some separation between commercial and investment banking activities would make sense.

Will reform get there, or will it continue to nibble around the edges? Ultimately, what legislators don’t accomplish with reform, bank customers can achieve by voting with their feet.

Customers will continue to shop for the best bank rates on CDs, savings, and money market accounts. They will also take reputation into consideration when choosing a bank, and right now, that favors smaller, less-complex institutions. A MoneyRates.com poll a few  months back showed that bank customers preferred local community banks and credit unions by an overwhelming 4-to-1 margin over large national and international banks. If the business of banking customers follows this preference, it may largely achieve the separation of business that reformers want.