Could we get a workable vrniaat of Romer’s Good Banks proposal moving forward?Here are some of the apparent limitations which would need to be overcome by a Good Banks proposal:- it takes time (especially for government) to create new banks and to attract people with the experience and connections to make sound lending decisions- it’s important to avoid enabling Government to choose winners and losers through the credit system- creation of good banks would cause a run on the old bad banksHere is just one variation of his proposal that seems likely to get past some of these limitations. We pass a statute to encourage Non-Bank Corporations incorporated in the United States (e.g. Sponsors) to do the following:- Create or Acquire a Bank with a clean balance sheet, structured as a subsidiary banking company.- Make a lump-sum initial or incremental investment in the Bank in the form of Common Stock, and submit a simple application (to the Secretary of Commerce-the Secretary) for a matching investment.- The Secretary by statute would have 30 days to deny the application or to place a matching initial or incremental investment in the Bank in the form of senior convertible bonds, paying interest at the same rates as 90-day Treasury notes. (The details for later conversion to common are important details, but that I haven’t worked out yet). Each matching investment by the Government would be limited to a maximum (maybe $250 million) in order to create diversification and broaden the impact geographically and across different business. The Secretary’s ability to deny any application would be strictly limited to a few key financial strength criteria.- If the Bank was not federally chartered, it would be required to apply for a federal charter within six months of receiving capital from the Secretary.- In order to prevent depositors from running to these new banks, the enabling statute would put severe limitations on their ability to accept deposits for the first five years.- The Sponsor would be specifically authorized by the statute to direct its new bank subsidiary to finance the purchase of the Sponsor’s goods and services for qualified buyers, subject to applicable FDIC regulations.- One of the limitations to be specified by the enabling statutes would be specific limitations on the amount of such purchases which could be financed by the Bank. (I would think that the minimum allowable amount would be 100% of the amount of new or incremental capital provided by the Sponsor, but it seems appropriate that it ought to be as high as 300%, if the Sponsor is a well capitalized and respected participant in American business.)- The available capital from the Federal government would be initially limited to $75 Billion. This would have the additional benefit of motivating Sponsor companies to act quickly to- All Banks which receive capital infusions from the Commerce Dept would be authorized to borrow directly from the Federal Reserve at the lowest available rates available to any federal bank which makes loans to Non-Bank Corporations in the United States.- Involvement in the affairs of the Bank by the Federal government would be strictly limited to the normal role of banking regulators to maintain the financial integrity of the Bank.- (This might be necessary) After-tax retained earnings of the Bank could not be transferred out of the control of the Bank to the Sponsor until after the Federal government has divested itself of any ownership interest in the Bank.4. Here are some of the benefits which seem obvious to me:- Thousands of well-financed and well-connected Non-Bank Corporations have a compelling incentive to act to create thousands of strong banks with clean balance sheets. Companies who might participate include giants like IBM, Apple, Cisco Systems, and others.- The federal government has the potential to double the reserve capital of these banks at attractive terms that create a powerful upside for Taxpayers.- Given a relatively modest bank gearing ratio, this proposal could quickly create $1.5 Trillion in new business lending capacity, at a budgetary cost of only $75 billion.- Each Bank’s own Sponsor has a shared commitment and risk sharing relationship with the Federal government.- One of the central dictums of sound bank lending is Know Your Customer. Each Sponsor will have the ability and the incentive to connect its Bank to client firms whose business operations are reasonably well understood by the Sponsor. Each Sponsor company would have the potential to offer financing by its Bank to its creditworthy customers (on very competitive terms).