Bigger is Better? Don’t Count On It.

Professor Calomiris of Columbia University argued that our banks should be allowed to get bigger and that this would make them better (WSJ 10/20). Just a few of our largest banks already control half of our deposits and loans. They are lobbying Congress to lift the restrictions on their size. But the cost of having such concentration was just illustrated, a near-depression experience to say the least! To see the folly in such thinking, consider that we end up with one large bank with 15,000 branches, one “cookie cutter” model for evaluating loan applications, and one group of “geniuses” investing our savings. One mis-cue would make our most recent experience seem like a walk in the park. Having just a few banks means no innovation, no experimentation, no way to account for “local market” differences, no “relationship lending” where “character” matters as well as “capacity” and “collateral”. Half of our private sector GDP is produced by small firms who employ the bulk of our private sector workforce. Big banks don’t want to bother with such small customers (90% of employers have under 20 employees) unless they fit the “cookie cutter” framework. Where does the competition come from when just a few banks (whose management has lunch together every day in New York) have all the branches (already the top two banks have 12,000 branches, far more that the 6,000 commercial banks operating today)?

Professor Calomiris says “We can solve the too-big-to-fail problem without losing the benefits of a global financial system”. Apparently we didn’t know how before, and it isn’t clear how we could do that going forward. Nice thought, but not likely in reality. We aren’t as smart as we often like to think. And while a behemoth institution goes through some new form of bankruptcy (yet to be invented), what would all of us ordinary folk do for banking services? It would be useful to have a number of large banks functioning to take care of the global firms we have, but those we have were already more than large enough to do this and clearly “too big to manage” – managers and Boards didn’t have a clue! That’s “too big to fail”! We need more focused institutions who are manageable in size, reliable, numerous enough to compete with each other and free to innovate and compete to the benefit of the consumers and firms they serve. Fewer larger banks is not the answer.