CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
1048 OREGON LAW REVIEW [Vol. 89, 951
banking system composed exclusively of narrow banks could not
provide credit to small and midsize business firms that lack access to
the capital markets and depend on banks as their primary source of
outside credit. 424
However, my two-tiered proposal would greatly reduce any
disruption of the traditional role of banks in acting as intermediaries
between depositors and bank-dependent firms because my proposal
would allow first-tier “traditional” banks (primarily communityoriented
banks) to continue making commercial loans that are funded
by deposits. Community banks make most of their commercial loans
in the form of longer-term “relationship” loans to small and midsize
firms. 425 Under my proposal, community banks could continue to
carry on their deposit-taking and lending activities as first-tier
banking organizations without any change from current law, and their
primary commercial lending customers would continue to be smaller,
bank-dependent firms.
In contrast to community banks, big banks do not make a
substantial amount of relationship loans to small firms. Instead, big
banks primarily make loans to large and well-established firms, and
they provide credit to small businesses mainly through highly
automated programs that use impersonal credit scoring techniques. 426
Under my proposal, as indicated above, most large banks would
operate as subsidiaries of second-tier “nontraditional” banking
organizations. Second-tier holding companies would conduct their
business lending programs through nonbank finance subsidiaries that
are funded by commercial paper and other debt instruments sold to
investors in the capital markets. This operational structure should not
create a substantial disincentive for the highly automated smallbusiness
lending programs offered by big banks because most loans
produced by those programs (e.g., business credit card loans) can be
financed by the capital markets through securitization. 427
Thus, my two-tier proposal should not cause a significant reduction
in bank loans to bank-dependent firms because big banks have
424 See, e.g., Neil Wallace, Narrow Banking Meets the Diamond-Dybvig Model, 20 Q.
REV. (Fed. Reserve Bank of Minneapolis, Winter 1996), at 3.
425 Wilmarth, supra note 120, at 261–66; see also Allen N. Berger et al., Does Function
Follow Organizational Form? Evidence from the Lending Practices of Large and Small
Banks, 76 J. FIN.ECON. 237, 239–46, 254–62, 266 (2005).
426 Wilmarth, supra note 120, at 264–66; see also Berger et al., supra note 425, at 240–
41, 266.
427 Wilmarth, supra note 6, at 777–78.