Banks as Utilities

Article by Alan M. White

Banks long ago ceased to be private property. Today's banks are comprised of teams of managers allocating and circulating the accumulated wealth of individuals, firms, and public institutions. Critically, today's banks are heavily dependent on state subsidy and support. By regarding banks as private companies, we have imposed an ideological straightjacket, thwarting true democratic control of banks. Vast concentrations of financial power and risk represented by banks remain after the recent financial crisis and, indeed, have grown dramatically. The absurdity of regarding banks as private is exemplified by the so-called “conservatorship” of the two huge wholesale mortgage banks, Fannie Mae and Freddie Mac, which were essentially nationalized during the 2008 crisis. Despite being capitalized and recapitalized by taxpayers, they remain nominally shareholder-owned and regulated by a separate federal agency.

Bank regulation in the United States remains constrained by an unduly narrow consensus regarding its appropriate means and ends. Domestic (Dodd-Frank Wall Street Reform and Consumer Protection Act) and international (Basel III) responses to the recent financial crisis are reshaping the relationship between banks and the state, but consist mostly of tinkering, rather than fundamental rethinking.

The public utility category, recognized by U.S. courts and legislatures from the early days of the Republic, offers a pragmatic alternative vision of the state-market relationship. Treating banks as public utilities would permit a wide variety of approaches to defining the public goals of banking and to restructuring the banking industry and its regulatory apparatus. Since the 2008 crisis, there have been calls for applying a utility regulation model to banking or, in an oft-heard phrase, to “make banking boring” again.

While utility regulation may call to mind state commissions carefully reviewing accounting statements of regulated monopolies or oligopolies and approving or disapproving price increases, utility regulation itself has undergone a transformation in the latest era of deregulation, beginning roughly in the 1980s. Efforts to transform public utility regulation into a competition-based model and to pursue efficiency above all other goals have had, at best, mixed results. Regulation of transportation, energy, and communications is in a period of ferment. Federal and state regulators have experimented with vertical and horizontal breakups, competition, nonprofit and state ownership, and a variety of other approaches. Utility regulators, however, continue to exercise robust control over essential energy and communication industries through the regulated-oligopoly model, in pursuit of a range of social values. Meanwhile, the ideological struggle continues between a pure efficiency-based neoliberal approach on the one hand and, on the other hand, the progressive view that industries essential to the economy should provide universal services at reasonable rates and advance other social goals.

This Article will advocate broad application of public utility law to banks, drawing on the literature on bank regulation and utility regulation, in order to assert democratic control of the state and market institutions that banks have become. The phrase “banks as utilities” can serve as a reconception of the relation between the state, public capital, and private capital. Regulated as utilities, banks can serve as structures for deploying public wealth in service of human development and economic justice, rather than as the instruments of inequality and accumulation they have become.

When I refer to banks, I will use the term to refer primarily to institutions that offer three basic functions: deposits, payments, and credit. Banks take deposits from the general public, facilitate payments, and extend credit to borrowers. Obviously, these core banking functions are found outside of banks as we know them, in the shadow banking system. Banks engage in many other activities, including trading derivatives, underwriting securities, providing wealth management and investment advice, and even offering insurance and other services. My focus, however, is on the regulation of the three core activities of banking under a model that would preclude shadow banking, with chartering and entry requirements broadly written to cover any entity offering the core banking functions. Many others have written on the important questions of how to divide regulatory responsibility for financial services, by institution, function, or otherwise. My approach is to assume that a functional definition of “banking” is possible, to assume as well that core banking functions can be separated from other financial services, and then to explore what it would mean to use a progressive public utility model, including public control of bank governance, pricing, services, size, and structure.

Part II of this Article will trace the history of public utility regulation in the United States, including its recent neoliberal transformation. The old common law and later progressive-era utility law promoted the values of social control over excessive economic power and social provision of essential infrastructure services. While recent partial deregulation and efforts to steer utilities towards a single-minded pursuit of economic efficiency have led to monopolization and instability in energy and other infrastructure sectors, utility law today is still characterized by a pluralism of goals and a variety of regulatory strategies.

Part III will trace the history of bank regulation and its core goal, protecting the stability and reliability of the deposit and payment functions, up through and after the 2008 financial crisis. Part IV will discuss how the pluralistic social values motivating the “old” public utility regulation could translate to a set of goals for socially motivated and democratic bank regulation. Part V will describe how the varied tools of public utility regulation could be usefully applied to regulate banks as utilities.

About the Author

Professor, CUNY School of Law


90 Tul. L. Rev. 1241 (2016)