Fall 1983 – Issue 30 - Stanford Lawyer - Stanford University

usiness, as in banking, we have toomany small and separate institutions,and many will disappear. Itwould be better for all concerned ifthat occurred by voluntary and negotiatedmerger rather than by failureor receivership, but no doubt we willsee more of both. The mix betweenacquisitions and failures will bedetermined in part by the way thebanking agencies and the Departmentof Justice's Antitrust Divisioninterpret the Clayton Act stricturesagainst market concentration. Definitionsof banking markets have forthe past two decades been unrealisticallynarrow, following theSupreme Court's 1963 PhiladelphiaNational Bank decision, but thatmay now be changing, at least so faras the Department of Justice is concerned.Does this mean that only financialconglomerates will be viable in thefuture? Will all savings and loanseither meld into broad-spectrumfirms or vanish? That seems unlikely,but they will be transformedin major ways. Some will becomeconsumer banks, although for thatthey will need broader authoritythan they now have on both the assetand the liability side. At present,S&Ls are too constrained by percentage-of-assetsinvestment limitations(in both their charteringlegislation and the tax code) and byrestrictions on offering checking accountsand competing for funds. Theneeded authority may be obtained byfurther amendments of the law, orby conversion into other types offinancial institutions.Some S&Ls may move from beingfinancial intermediaries holdinglarge loan portfolios to beingprimarily mortgage bankers- originatingreal estate loans but sellingthem to pension funds and other institutionalinvestors or packagingthem into mortgage pools for sale tothe public. There are advantages toportfolio diversification, in terms ofreducing unnecessary risk, that aspecialized lender cannot achieve;but there are also advantages tospecialization in originating and servicing,particulartypes of loans. Onestrategy might be for some associationsto use a reduced base of savingsaccounts to carry, not an extensiveloan portfolio, but rather the inventoryof a dealer being held brieflybefore resale. In this manner, theultimate credit and market risk isborne by more diversified lenders.Another strategy might be for associationsto draw on their knowledgeof real estate to move into realestate development directly, a trendlong discernible in California and afew other states (although limited inamount). Real estate development isa much more risky line of businessthan secured lending, and the requiredequity capital is accordinglymuch more expensive. S&Ls would,therefore, have a competitive advantagein such pursuits if they alonecould raise funds at the lower ratescommanded by relatively riskless insureddeposits, reinvesting at thehigher rates associated with theequity interest in real estate development.That of course amounts totransferring the risk to the FederalSavings and Loan Insurance Corporation(FSLIC) and exploiting itsuniform premium system.The FSLIC is currently studyingthe possibility of varying its premiumaccording to an institution'srisk; but the risk FSLIC initially hadin mind appeared to be mostly themarket risk from an imbalance inasset and liability maturities, ratherthan the higher variance in returnsfrom activities like real estatedevelopment. To be of value, theFSLIC study must encompass notonly both those kinds of risk, butanother kind as well. The risk to theinsurance corporation is not simply adirect function of the portfolio risk ofthe firm, because the failure of afinancial institution is not an unmistakableevent, like an auto accidentor a flood. An S&L failure representsa judgment by a supervisoryagency to close the firm or force itout of existence. The insurer's risk ispowerfully affected by the supervisor'sdecision to foreclose orforbear, a decision that is not easilymodeled or assessed. In any event, itis good to see the idea of a risk-basedvariable insurance premium beingtaken seriously. Ten years ago, TomMayer and I made such a proposal*in a study done for the Hunt Commission,and at that time the ideawas regarded as so far out that theCommission disposed of it in asentence or two.(continued on p. 61)*Scott and Mayer, Risk and Regulation inBanking: Some Proposalsfor Federal Deposit InsuranceReform, 23 STAN. L. REv. 857 (1971).Fall 1983 Stanford Lawyer15