Who values big banks?

By Felix Salmon
January 23, 2010
The Epicurean Dealmaker has some stern words for those -- Andrew Ross Sorkin springs to mind -- who would say that there are some things only big banks can do:


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The Epicurean Dealmaker has some stern words for those — Andrew Ross Sorkin springs to mind — who would say that there are some things only big banks can do:

The assertion that large, multi-line financial conglomerates provide customers with services no smaller institutions can deliver is pure poppycock… Wholesale institutional clients make a point of using more than one investment or commercial bank for virtually all their financial transactions, no matter what they are. In fact, the bigger the deal, the more banks the customer usually uses. This is because banking clients want to 1) spread transaction financing and execution risk across multiple service providers and 2) make sure none of these oligopolist bastards has an exclusive right to grab the client by the short and curlies. Just look at securities underwriting data, for chrissakes: as the number of independent investment banks has shrunk (and their product lines, geographic reach, and balance sheets have swollen) over the past 20 years, the average number of book running underwriters per transaction has risen. This is not the result one should expect if one believes customers prefer to use giant universal banks as one-stop shops.

The next time that you hear a senior investment banker intoning ponderously about the importance of being able to serve clients across multiple geographic regions and asset classes, ask for references. These banks all claim to be so client-focused, but where are the clients’ encomia to the megabank model?

If there was a wave of jubilation in corporate America when JP Morgan bought Bear and BofA bought Merrill, I think I missed it. Is there a single multinational saying “this is great, now we can use just one institution for all our banking needs”? Of course not. And even if there was a bank big enough to keep the entirety of a $20 billion loan to Pfizer on its own balance sheet, there’s no way that Pfizer would accept such a deal.

Being big is great, if you’re a big bank. But for the rest of us, big banks do little but increase systemic risk. There’s certainly no indication of any economies of scale when it comes to things like fees on our checking accounts. So the next time you think that someone else surely values these banks’ size, think again. Yes, they can be extremely profitable. But that doesn’t necessarily mean they’re valuable, on a societal level.

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