Answers on Breaking Up the Big Banks

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Aaron Klein writes,

While big banks are extremely politically unpopular, people are increasingly banking at large banks.

Pointer from Tyler Cowen. My comments:

1. I guess once Brookings is bought and paid for, they stay bought and paid for. Remember?

2. Don’t try to make it sound like people are switching out of small banks as a conscious preference. Big banks do not grow organically, like Wal-Mart or Costco. They grow through mergers and acquisitions. I did not choose to bank with Capital One. Capital One simply swallowed up Chevy Chase Bank, the community bank where I had my accounts.

3. Don’t try to make it sound like an international business cannot operate without a bank at its disposal with at least $1 trillion in assets. My guess is that $10 billion would be plenty big for a bank to be able to satisfy multinational businesses. Remember that if there were fewer ginormous banks, there would be many more large banks. Banks can syndicate deals, also.

4. Don’t try to make it sound like big banks are an American comparative advantage. On the contrary, if we have a comparative advantage in finance in the world, it is that historically we have had other large institutional sources of capital.

5. Don’t tell me that you have solved the too-big-to fail problem. See my tests for that in the link in (1).

11 thoughts on “Answers on Breaking Up the Big Banks”

  1. …millions of Americans would be forced to switch their banks once larger banks were forced to drop customers to conform with the size limits. Changing banks would impose both a one-time transition cost on millions of account holders and many would also incur more in ongoing fees and expenses that result from having access to smaller ATM networks, fewer convenient locations, and a lack of broader services.

    This is just wrong. Banks work hard to acquire new depositors. If large banks were forced to shed them, medium sized banks would be bidding against one another and paying a premium to acquire them. If you were one of the account holders forced to undergo this “one time transition cost,” probably the only real cost imposed on you would be you get a new routing and account number, so you have to fill out a new direct deposit form at work and hand it in to HR. The depositors aren’t going to feel the cost of any such transition, the acquiring bank’s shareholders are. This is absurd and the author knows it.

    • This is a cost, as evidenced by the fact that most depositors don’t switch banks when a bank acquires their bank. I’m actually in the middle of switching banks now, and its way more than just a new direct deposit form. You have to set up a whole new billpay if you use that. And if you have have automatic credits for recurring payments, like mortgages, student loans, insurance, netflix, etc. you need to change all that too. It’s a hassle.

      • There is some time spent setting up the new recurring transactions but you’re not actually deprived of any money as a result of the change. That’s my point.

        • Time is money. I’m pretty sure this is what the author was referring to when he said “one-time transaction cost.” He did not mean the people would need to pay money.

  2. I’m not entirely clear on why bank big Ness is the problem. Lehman wasn’t too big to fail. It failed just fine. Does contagion spread faster among big banks or small ones? Do business model fads spread faster? Etc.?

  3. Before doing away with Glass-Steagall , banks were big, but much smaller than now and multinationals had no problem getting their banking needs served. Deposit taking activities should be ring fenced from the rest of the holding company much as takes place with insurance companies. Should the holding company get in trouble, the regulators can seize the sub that is deposit taking and sell it with the rest of the entity reorganizing either in or out of court.
    While we hear about the costs of to big to fail, we do not get a quantitative presentation of the benefits of these large institutions. If that cannot be quantified, well that may speak volumes.

    • “Deposit taking activities should be ring fenced from the rest of the holding company”

      Congrats, you just described existing law.

  4. Even as Democrat, I thought the whole Gless-Stengell was kind of hobby horse and nobody is quite explained why the big banks are more of a problem than small ones. My guess many people are banking at big banks for convenience (more ATMs).

    Anyway the best to get somebody to compete with Big Banks, is to allow more licenses for Banking with Wal-Mart and possibly Apple.

    • The nominal problem of TBTF banks is that they are too big…to fail. But no banks are really allowed to just fail.

      I’m certainly of the instinct that smaller banks would be better and bigger banks probably exist due to unfair advantages, but until we understand the real problem all the proposals are probably going to make things worse. And they did!

  6. As a self-interested depositor, why would I not want my deposits at a bank too big to fail?

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