American Banker surfaces a golden oldie: the paper entitled "Are Banks Special?" published 31 years ago by Gerald Corrigan when he was president of the New York Fed. You can anticipate the answer from the title (hint: yes). In a nutshell:
Reduced to essentials, it would appear that there are three characteristics that distinguish banks from all other classes of institutions—both financial and nonfinancial. They are:Link. Corrigan, reflecting on his own handiwork 20 years later, summarized:
- Banks offer transaction accounts.
- Banks are the backup source of liquidity for all other institutions.
- Banks are the transmission belt for monetary policy.
Building on those core traits, a simple, but formal, definition of a "bank" was suggested. A "bank" was defined as any institution that was authorized to issue deposits which were "payable on demand at par and readily transferable to third parties." Given the core traits and the definition of a bank, the essay went on to stipulate that public interest considerations associated with banking were such that only banks should have access to the full-scale public safety net for financial institutions as defined in the essay.Link Corrigan went on from the Minneapolis Fed to serve for eight years at the head of the New York Fed (his wife is a former head of the Boston Fed--family business). He is still alive and active today clad in sackcloth and surviving on nuts and berries as a partner at Goldman Sachs. Be wonderful to hear an update from him today, with reflections on his own career as it relates bank risk management.