Skip to main content

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.


Popular posts from this blog

How Valuable Are Connections?

Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak and Todd Mitton have written a paper on whether firms connected to Timothy Geithner benefited from these connections. They do so by looking at how stocks of these firms reacted to the announcement that he was a nominee for Treasury Secretary in November 2008. They find that there were large abnormal returns for connected firms. Below is the paper's abstract and the full paper is available here . The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected firms when news broke that Geithner's confirmation might be derailed by tax issues. Excess returns for connected firms may reflect the perceived impact of relying on the advice of a small ne...

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press . 

Bank Runs in Greece

Deposit withdrawals in Greece have been substantial over the past two years.  However, the failure of Greece's politicians to form a coalition government has resulted in deposit withdrawals accelerating - click here and here for more on this.  Depositors are rightly concerned about the exit of Greece from the euro and the subsequent devaluation of their deposits.  The puzzle for me and many others is why are there so many deposits still remaining in the Greek banking system.  One reason is that the Greek banking system is being kept alive by massive injections of money from the ECB.  Will the ECB continue to support the Greek banking system in the face of a mass withdrawal of deposits?  I doubt that there is the political will in Germany for this as the Bundesbank already has a huge exposure to Greece (as well as Spain and Italy) through the ECB's internal Target 2 system.