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.

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