Big Banks: Are They Dinosaurs That Deserve To Die?

The one thing the blogosphere seems to be long on right now is opinions about nationalizing one or more of the nation’s banks. I’ve made my opinion pretty clear before. Just do what we’ve always done, place insolvent banks in receivership and reconstitute them as quickly as possible. Putting that aside, it’s occurred to me that in one sense this country has been incredibly dumb lucky when it comes to its banks. 

We, more by accident rather than design, are lucky enough to have a banking system in which the assets held by the sector are spread across an incredibly large base of institutions. Though not desirable, the country could afford to wipe Citi off the face of the map and not incur any substantial harm. Yes it would be costly but the cost would be manageable and the system as a whole would not be threatened.

The same could not be said for, say Germany or Switzerland. The assets of Deutsche Bank, for example, are larger than the GDP of Germany. Faced with the prospect of eliminating it as a going concern would place severe economic strains on Germany. Moreover, it would wipe out a significant part of the German financial system. Could they pull it off? Sure, but only at a much higher cost than a similar action against Citi would impose upon the U.S.

Circumstances, many of which we do not control, will decide whether or not Citi and a number of other banks survive. We may, however, want to reconsider just how we want our financial system organized as we start to come out of this. The preservation of a highly distributed system of banking assets would seem be one goal. Should we, therefore, redesign the system to encourage development along these lines.

It may be time to rethink the scope of activities we will allow banks to engage in and yes that does mean rethinking the repeal of Glass-Steagall. For years the assumption has been that a competetive banking system required the presence of very large financial institutions lest we lose the race to the European model universal bank. At this time, that model appears to to pose a risk out of proportion to the benefits it purports to confer.

Will smaller become the template for financial institutions in the second decade of this century?

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