Comments on: Are Big Banks Better?

By: Amar Radia

Amar Radia — Sun, 01 Nov 2009 15:39:40 +0000

There’s another advantage that big banks have that you don’t seem to have mentioned. Bigger banks are able to shield themselves better from shocks. When there is a shock affecting one of the sources of funding for a bank then bigger banks can insulate themselves from this shock by obtaining other sources of funding. Small banks may not have access to these other sources, or may have to pay a bigger premium for external financing. There is decent evidence for this being the case. Some of the evidence comes from the bank lending channel/credit channel literature eg Kashyap and Stein (2000). The bottom line is that bigger banks experience less in the way of financial frictions.

By: Redleg

Redleg — Wed, 28 Oct 2009 00:45:14 +0000

The title made me laugh…
Good rebuttal.
Having been through a number of mergers and reorganizations, I find it really hard to believe there is any economy of scale to be had since (IMO) the best talent usually leaves, and the dead wood stays (Disclosure -I’ve been both). I know there are exceptions, but in the short run the odds are against quality improving. Over time it gets better but in the first year or 3 after, *Phew*!

By: TonyForesta

TonyForesta — Wed, 28 Oct 2009 00:27:38 +0000

Big banks offer some advantages smaller, or local banks do not, – but this reality does not in anyway support the need for criminal oligarchs, who injure the American public and rob us of our taxdollars.

No one, and NO THING is to big to fail.

By: Amit Chokshi

Amit Chokshi — Tue, 27 Oct 2009 21:34:15 +0000

The WSJ op ed was – as usual – pathetic. I had written a rebuttal re this at my blog where it was also on Seeking Alpha. Anyone interested can read at :

http://www.kinnaras.com/cblog/index.php?/archives/58-Columbias-Calomiris-Slept-through-2008.html

By: Ardra

Ardra — Tue, 27 Oct 2009 18:57:46 +0000

Actually, it doesn’t seem to me that Canada’s regulatory system is all that dramatically different from the American one. Canada did however experience a collapse in their derivative market or asset backed commercial paper (ABCP) as it is known there in August of 2007 and investors fled the market a full year before the crisis hit in the U.S. (The crisis there being blamed, not surprisingly, on lax regulation.)

See this article from September 2007
http://www.canada.com/nationalpost/news/story.html?id=3f92dc01-2dce-41a1-8035-358121a6725a

By: Mickey Hickey

Mickey Hickey — Tue, 27 Oct 2009 17:55:26 +0000

The differences between US and Canadian banks are that the Canadian banks are less than 10% the size of the US behemoths. The Canadian Government is seen as part of the solution by the electorate and have tightly regulated and inspected the Canadian banks. For example how did Harris Bank of Chicago a subsidiary of Bank Of Montreal fare compared to its virgin pure domestic competition. We should also look at the source of senior management the business schools and their product the MBA/Lawyer/Economist fraternity. I use the word fraternity because I see many honest forthright women trying to put things right. I see many over educated,overpaid men worshiping at the altar of false gods and benefiting from it. I might add that I also see a very docile easily gulled population. In time I have no doubt that the US will survive what Regan started and will rechart the course to prosperity.

By: David Beckworth

David Beckworth — Tue, 27 Oct 2009 14:41:16 +0000

James Kwak:

Your arguments seem awfully compelling regarding the problems created by big banks, but the one question I have is how to make sense of the Canadian banking system. They have a banking system dominated by a few large banks that appear to have weathered this crisis well. As I recall, the Canadian banking system also happened to have done much better than the U.S. during the Great Depression as well.

One story I have heard is that the reason they have done so much better is because they have had interprovince branch banking through much of their history. This U.S. banking system, on the other hand, has been plagued by unit banking laws until a few decades ago. As a result, Canadian banks had more diversified portfolios of assets than U.S. banks and thus were less succeptible to economic shocks. If true, this implies banks should be big enough at least to have branch banking. So how does all of this fit in with what you and Simon have been saying?

By: Silke

Silke — Tue, 27 Oct 2009 14:02:49 +0000

sounds nice but will it be effective?
they change names re-configurate merge and acquire as long as it takes them to become unrecognisable and swish they’ll be back

- so maybe a regulation that defines what of this stuff is obfuscating and what is sound business should be invented????
Would probably take Douglas Adams’ supercomputer to come up with a definition which would then be an equivalent of 42

By: redleg

redleg — Tue, 27 Oct 2009 13:49:44 +0000

What is the expected effect of FASB 166 and 167 on TBTF banks?
Will they be given waivers (again)?

By: Bayard

Bayard — Tue, 27 Oct 2009 04:23:29 +0000

I would note that you are talking really about whether merged banks are better for themselves, as opposed better for the generalized economy. I really don’t think that there is much question that they are better for themselves, although really this may not be true in a normal regulatory environment (we haven’t had super banks back in the days of real banking restriction (pre Glass-Steagall) so we really may not be able to be sure. The main problem as it see it is that they tend to tie up large amounts of capital that only gets exposed to their profit churning, and which misses being distributed into the rest of the ecomony. That is that they probably now are using up about half of all available capital in economic churning for easy profits, ala Las Vegas, and not assisting in the real economy because their “ordinary banking business” is much less profitable that their role in investment banking.

After all, if we look at the bigs, they are really nearly out of the local lending business, and marginal on the bigger deals. So big is strangling the economy. I don’t have access to the kind of statistical support, but this is how ita appears. It would be nice to know if I am right in my perception. Maybe you or Simon can shed some light on this. It is very topical, since we are trying to regulate AND INCENTIVIZE BETTER BANKING PRACTICES IN THE TBTF REALM.

By: Redleg

Redleg — Tue, 27 Oct 2009 01:15:49 +0000

Yes. The age old debate of quantitative model vs. empirical evidence. Silly folks with their models forget that reality trumps the model every time.

By: oldgal

oldgal — Mon, 26 Oct 2009 20:53:38 +0000

Seems to me good management will trump bad management on the productivity stats no matter what the size (assuming the stas are derived from honest numbers). I also have a theory that bad management is not obvious when economic times are good, only when they start going bad. We either need early warning signals that bad management is happening and a way to replace it, or we need to limit the impact bad management can have on the overall economy. Limitations on the size of banks and/or the types of business they are allowed to conduct would be one way of doing this.

By: jake chase

jake chase — Mon, 26 Oct 2009 20:39:03 +0000

What has changed is that political economy was eclipsed by economics. In economics one starts with bogus assumptions and then proves we live in the best of all possible worlds except when government attempts to interfere with monopoly. A person can peddle this notion all the way to the US Supreme Court unless he is simply unlucky and must settle for a seat on the Court of Appeals and a sinecure at the University of Chicago.

Another popular branch of economic wisdom holds that markets are always rational; therefore, interference with markets is always wrong. Proving this with advanced mathematics will get you a Nobel Prize which you can still keep after you blow up a billion dollar hedge fund operated on the premise you have proved.

Now if YOU can only prove by advanced mathematics that interfering with offshore capital accumulation and tax evasion and banker profits improves the welfare of those now satisfied with electing an Obama, perhaps we can return to 1890 or at least 1914. Otherwise we must settle for government by GoldmenSack and lectures from squid.

By: btraven

btraven — Mon, 26 Oct 2009 20:23:36 +0000

Yes!

By: btraven

btraven — Mon, 26 Oct 2009 20:21:36 +0000

Yes.