Wednesday, April 08, 2009

Does Britain Need Smaller Banks?

George Osborne, possibly the next Chancellor of the United Kingdom Exchequer, has asked some good questions about the right size of banks. (Robert Peston, Tories to break up banks?, BBC 8th April 2009)

"We cannot allow one part of our economy to behave in a way that puts the rest of the economy at risk when it fails. We need to think deeply about whether we can sustain banks that are not only too big to fail, but potentially too big to bail."

"We should look at whether Britain in fact needs smaller banks. For it would be a bitter irony if we came out of this crisis with a banking system that was even more concentrated and even riskier than the one we had before it."

It is no longer obvious that large banks are any more financially viable than small banks. What seems pretty clear is that large banks are more difficult to regulate. What was the economic logic behind all those mergers and acquisitions in the banking sector anyway? Whatever may have been gained in terms of the economies of scale were totally blown away by the economies of governance.

Umair Haque asks (rhetorically) why bankers never talk about reforming banks. However, as Osborne points out, now that the British government owns a large chunk of the banking sector, there is an opportunity to make radical changes to the sector as a whole, rather than merely controlling the behaviour of each company within the sector. I hope this will allow a serious debate on the scale and granularity of business. See my earlier post on Business Model and Financial Viability.

Update: Here's what Henry Mintzberg has to say about General Motors, in a piece called America's monumental failure of management (Globe and Mail, 16 March 2009).

We hear now about "too big to fail." "Too big to succeed" is more like it. General Motors has been going slowly and painfully bankrupt for decades, managerially as well as financially. The new money will only put off its demise. Americans will have to face this reality sooner or later.

See also Towards Partition (Economic Principles, April 2010).
and Do banks need more intelligence? (Demanding Change, May 2010)

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