You hear a lot these days that banks need to be big to serve their clients. Charles Calomiris said this morning that we can’t run the global economy with “mom-and-pop banks.” Sure, I’m willing to concede that. But how that’s a silly debating tactic. More seriously, how big do they need to be?
Yves Smith, no friend of the mega-banks, says, “The elephant in the room is derivatives. The big players have massive OTC derivatives exposures. You need a really big balance sheet to provide OTC derivatives cost effectively.”
Here’s a starting point. In 1998, Goldman Sachs had $217 billion of assets. (Lehman had $154 billion.) In today’s dollars (using the GDP price index), that would be about $270 billion. I think that they were probably doing a perfectly good job of serving their clients at the time. Adjusting for inflation, I don’t think their clients are substantially bigger or more global now than they were then. So the question is (multiple choice):
(a) Has the financial world changed so much that Goldman now needs more than $270 billion to serve clients effectively (and if so, is that change we want)?
(b) Is $270 billion enough?
I don’t claim to know the answer to this one, but if it’s (a), I’d like to see some evidence.
By James Kwak