— Mark T. Williams, a former Federal Reserve Bank examiner who teaches finance at Boston University School of Management, is the author of the soon to be published “Uncontrolled Risk” about the fall of Lehman Brothers. The views expressed are his own. –
Too big to fail has become nothing more than a political sound bite and the title of a best-selling book. Unfortunately, in the process big banks have gotten a bad rap. The proposed Obama administration plan to limit bank size is just another example of big-bank bashing by high-level politicians.
Policy that simply focuses on downsizing big banks overlooks an important point. The problem is not that banks are too big; it is that banks are taking excessive risk. This includes big and small banks. Since 2008, more than 170 banks have failed, including big banks such as Lehman Brothers, Wachovia, and IndyMac. But most on this list – such as Citizens State Bank, Republic Federal Bank, and First State Bank — are smallish. They didn’t make big headlines. No books were written about them or movies made.
The fact that a bank is big should not automatically mean they are a threat to the financial system. It’s true that Citigroup, once our nation’s biggest bank, needed a massive government bailout. But this singular sample size is not large enough on which to base far-reaching policy changes.
Big banks offer many advantages over smaller ones. They provide consumers with a greater array of desired services and economies of scale allow them to deliver more for less, and they tend to have greater capital to protect them against unexpected losses. In many countries in Europe and elsewhere, the universal banking system (another phrase for big banks) dominates the market. In these countries, a universal big-bank system works.