Another Reason for Banks to be Small

By Felix Salmon
March 31, 2009

Mike at Rortybomb finds some empirical research on what happens to loan rates when banks get bigger and more consolidated. The results make intuitive sense: as competition falls, loan rates go up. The exception is loans which can be securitized, like auto loans: those rates can fall as economies of scale improve.

The lesson here is that we should keep banks small, while encouraging securitization — which of course itself helps in reducing the size of banks’ balance sheets. Bank competition is good for consumers; big banks are bad for consumers. It’s worth remembering that, as we construct a new regulatory regime.

5 comments so far

Good points. Banks should be kept small, at least relative to the markets that they are in. A US bank should not be allowed to get so big that a calamity for that bank creates a calamity in the larger US banking system. But, at the same time, they should have every reasonable opportunity to achieve economies of scale. Therefore, we should strive to get them access to other markets like Mexico, Brazil, South Africa, etc. while never letting them get so big that their failure would bring down any market they were in. If a bank had a sliver of 80% of all the banking markets in the world it could achieve great economies of scale yet its collapse would not imperil any of those markets.

Banks should be kept small relative to the markets that they are in. A bank that had a sliver of 80% of the world\’s banking markets would be able to achieve great economies of scale. But if it collapsed it would not imperil any of those markets.

I do think, however, that they should have to keep a sliver of the loans that they originate to keep them honest. But better transparency with regard to the instruments would help in itself.

Oops! I though I lost the first post. Feel free to drop one of them. I said the same thing twice. Sorry!

I think the readers may have missed the point of the present financial problems in the USA which have spread world wide. It is a question of regulation which would not allow mortgages and other financial instruments to be approved to customers who cannot afford the mortgage or have no equity in their home. It would regulate the selling of these toxic mortgage packages.

Canada which has a more conservative policy and regulation of banks has resulted in Canadian banks making total profits over the last couple of quarters in the order of several billion dollars whilst other banks in the western world have been bailed out. I don’t think it is a question of size but of regulation. Regulation does not mean socialization!

Posted by Paul | Report as abusive

I think we don’t want too much of either one if we’re late on a payment or bounce a check. First I think we should stop this rediculous nonsense of a ten dollar payment one day late has a $35 dollar fee added on. Or a check for even a dollar can be bounced ten times at a total of $350 dollars. Also they entice your credit accounts there with free interest hoping you will mess up and they can up it to 20%. Got them once at their own game here. It didn’t say charge cards. I put my house on it for a year then scheduled auto-pay. I could never get away with this at my local bank. On second thought let’s keep both.

Posted by Gringo | Report as abusive
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