Moral Hazard Deposit Insurance and Banking Regulation
![handle is hein.journals/clqv77 and id is 1125 raw text is: MORAL HAZARD DEPOSIT INSURANCE AND
BANKING REGULATION
Harris Weinsteint
I
INTRODUCTION
A century and a quarter ago, Walter Bagehot, the Victorian so-
cial critic said: 'The distinctive function of the banker begins as
soon as he uses the money of others'; as long as he uses his own
money he is only a capitalist.'
In the words of Justice Brandeis, honest bankers who are us-
ing ... the money of others, realize that they hold the money in
trust for its owners and must be fair to the beneficiaries.'2
Banking thus is a fiduciary activity.3 For that vast majority of
bankers who are scrupulously honest, that fiduciary precept is self-
evident, self-executing, and unvaryingly observed. As the recent
savings and loan experience demonstrates, however, a significant
minority do not voluntarily adhere to fiduciary principles. Yet costly
fiduciary failures are not unique to the savings and loan story. Sig-
t The author was appointed Chief Counsel of the Office of Thrift Supervision of
the U.S. Treasury Department in May of 1990. The views expressed in this speech are
those of the author.
1 WALTER BAGEHOT, LOMBARD STREET: A DESCRIPTION OF THE MONEY MARKET 11
(1873) (quoting David Ricardo).
2 Quoted in ALPHEUS THOMAS MASON, BRANDEIS: A FREE MAN'S LIFE 409 (1946).
3 See Lane v. Chowning, 610 F.2d 1385, 1388-89 (8th Cir. 1979) ([I]t is well set-
tled that the fiduciary duty of a bank officer or director is owed to the depositors and
shareholders of the bank, and not to the Chairman of the Board or Chief Executive
Officer.); First Nat'l Bank of La Marque v. Smith, 436 F. Supp. 824, 831 (S.D. Tex.
1977) (fiduciary obligation of corporate officers is even stronger in the case of a bank,
both because of the fiduciary nature of banking and because of the duty to depositors.);
Federal Say. & Loan Ins. Corp. v. Huff, 704 P.2d 372, 378 (Kan. 1985) (state corpora-
tions statute establishes [that] the legislative intent is to place higher standards of duty
on savings and loan institution officers than on officers of ordinary for profit corpora-
tions.); Gibraltar Realty Corporation v. Mount Vernon Trust Co., 12 N.E.2d 438, 439
(N.Y. 1938) ([A] bank deposit is more than an ordinary debt, and the depositor's rela-
tion is more than an ordinary debt, and the depositor's relation to the bank is not identi-
cal with that of an ordinary creditor.). See also Briggs v. Spaulding, 141 U.S. 132, 147
(1891) (Bank directors are often styled trustees, but not in any technical sense ....
But, undoubtedly, under circumstances, they may be treated as occupying the position
of trustees to cestui que trust.).
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Moral Hazard Deposit Insurance and Banking Regulation
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