Since 1970, U.S. law has prohibited banks from tying their loans to other non-banking products, even if the bundle of services is offered at a discount to customers.

Sometimes in the temporary zeal to enforce a particular law, policymakers forget to ask the basic question of whether the underlying law makes sense. In this case, it doesn?t. Robert Litan argues that the time clearly has come for the flat prohibition against bank tying of loans to be replaced by the rules of the antitrust laws. Of course, the law requiring banks to book their loans at arms-length market terms should remain in force to prevent banks from under-pricing their loans in order to land other business.

Too radical, you might say? Then, Litan recommends initially replace the tying prohibition with an antitrust rule only for the large, publicly held companies that already have issued or want to issue commercial paper, the market?s best alternative to bank lending. Why shouldn?t these borrowers get the same benefits that they can get when purchasing other goods and services?

Also, view Dr. Litan's press release for this article.