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Banks: Small is Beautiful (and Safer)

It looks like Simon Johnson (former chief economist at IMF) has it in for big banks - click here and here.

He is right, of course, to be worried about big banks.  I have always had a problem with big banks because they are perceived to be 'too big to fail' or 'too important to fail'.  The great irony for me is that the 2008 crisis actually resulted in some banks becoming even larger behemoths than before.  

In 1900, there were nearly 100 banks in the UK, and the top five banks only had circa 25% of the market.  Today, retail banking in the UK is dominated by the 'Big Four'.  As these institutions are believed to be 'too big to fail', taxpayers have to bail them out whenever they get into trouble.  The implicit policy of 'too big to fail' prior to 2008 resulted in many of these banks taking too much risk in the first instance as they knew taxpayers would bear some of the downside of their risk-taking, whilst owners and managers bear all the upside.

Conclusion: we need smaller banks.


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