Should the large banks be broken up?

by on May 24, 2010 at 6:21 am in Uncategorized | Permalink

Here is one piece of evidence which says no.  The bottom line seems to be that large banks are better at mobilizing capital internationally:

An essential step to see if this view has ground is analysing how multinational banks have been faring in the months of the crisis, in comparison to domestic banks. Given the key role of these multinational banks in supporting the real economy, whether their subsidiaries in host countries have been restraining the amount of resources provided to local residents during the recession.

In a recent paper prepared for the Economic Policy panel in Madrid (Barba Navaretti et al. 2010), we provide both aggregate and micro evidence that multinational banks have actually contributed to the stabilisation of financial markets in Europe and to the provision of credit to the real economy (notwithstanding the systemic nature of the crisis).

The aggregate banking statistics of the Bank for International Settlements show that the total local claims held by the affiliates (branches and subsidiaries) of multinational banks in host countries in Europe have been stable and even increasing between the beginning of 2007 and the third term of 2009, both in absolute terms and normalised by GDP or total financial activities (Figure 1 for total local claims in local currency). Claims have been rising also in the major Central and Eastern European Countries where foreign banks account for the dominant share of total banking activities. This pattern is consistent with broader worldwide evidence.

Here is the conclusion:

Contrary to popular belief, our results show that a world with only small and domestic banks is no safer. Rather, we show that the size and the global extensions of the activities of multinational banks positively contributed to hedging the downturns of the crisis, even in transition economies.

acekard ds May 24, 2010 at 7:19 am

I had read this article and I am somewhat impress with this. There are number of risks inherent in large financial institutions. Let’s see what happen next. Very informative article and love to look forward.

Master of None May 24, 2010 at 8:32 am

This conclusion is not surprising. In fact, it’s what we’ve heard from Bernanke, Krugman, and the banks themselves, namely that lots of small banks can be just as systematically risky as a few large banks.

However, this study does not address the moral hazard dilemma that has resulted from the concentrated political power in our largest institutions (including big auto).

This should be presented in terms of trade-offs. On net, are we safer with or without big banks?

Bill May 24, 2010 at 8:45 am

Before investment banks were “too big to fail”, and were private partnerships with the assets of individual partners at risks, investment banks did more syndication and joint underwriting to spread risk.

So, requiring syndication or joint underwriting–spreading risks–might be a solution, so long as there is not a single buyer–such as AIG–on the other aggregating those risks as a purchaser.

Yancey Ward May 24, 2010 at 11:48 am

bbartlog,

+1000

Thomas Esmond Knox May 25, 2010 at 2:24 am

Not necessarily.

The US has by far the largest economy in the world but (by my count) only 5 of the top 30 banks by market cap.

Seems incongruous that China has bigger banks than the US.

Eric Rasmusen May 25, 2010 at 10:36 am

I didn’t read the article, but does it address the possibility that the big banks stabilized things only because they got massive bailouts from the government? The big banks not failing is a bug, not a feature.

Comments on this entry are closed.

Previous post:

Next post: