One Idea to Scare the Banks into Acting Better

People say that Treasury and the Federal Reserve have their hands tied with how the banks use their TARP funds.  They say that it is up to the private market to allocate the capital.  And, even the leaders at these regulatory institutions appear to be frustrated (“slamming the phone“) and short of alternatives on how to deal with banks when they don’t follow with the game plan.

Here’s one simple way to make them listen.

The solution is simple.  Use a hammer, rather than carrots.

Give Wal-Mart a banking charter.

Wal-Mart applied for a Utah industrial bank charter in 2005.  The banking industry went into convulsions.  Small banks didn’t like it.  The big investment banks (Goldman Sachs, Merrill Lynch) and the finance companies (GE Capital, GMAC, CIT) many of whom have their own Utah charters, felt that Walmart should face a different standard.  They realized that if Wal-Mart went into banking, they would quickly amass huge deposits.  Many consumers, frustrated by the quality of services offered by banks, would flock to Wal-Mart.  It would be the end of those $35 overdraft fees.  Wal-Mart would probably have some $4 fee!  Imagine that.  Oh, and they’d make money doing it, because there has probably never been a corporation that finds ways to reduce costs.

In 2007, Wal-Mart withdrew its application.  Still, the current furor over banking practices might be just the right leverage for a re-examination.

Wal-Mart would also introduce many new customers into the banking system.  Right now, our nation has a huge problem with unbanked and underbanked households.  In 2004, the FDIC estimated that there were 10 million households in the US that operated without basic banking services.

Why is that bad?  Well, it is impossible for banks to realize cost-savings from electronic transactions if people don’t have a means of interaction with the payment system.  People opt out of the banking system because they are weary of the fees associated with banks.  Banks work well if you have $5000 in a saving account.  You get plenty of freebies – maybe a no-cost safe deposit box, or free checks, or free statements at your ATM.  If you are low-dollar household, banks nickel and dime you every step of the way.  This is why there are so many check cashers around.

Moreover, its unlikely that Wal-Mart would pay any of its banking staff sums equivalent to the kinds of bonuses that are routine on Wall Street.  Consider what Morgan Stanley paid in 2008, where a bad year meant that its average worker (CEO to mailman) earned $262,000.  That would pay for a lot of clerks.

No one is particularly charmed by Wal-Mart.  But right now, banks are even less charming. Even the threat to approve the charter would probably have a desireable impact.  Its remarkable what a little competition might mean to these advocates of the “free market.”