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How to cut megabanks down to size

nytimes.com

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Re: How to cut megabanks down to size

#21

Post by Lambent_Cactus »

rwmj wrote: post #13

I'm confused by this. The large banks are (arguably) more efficient because of economies of scale, eg. less duplicated management, purchasing power. So it's probably not a good idea to limit the size of banks which is what this article seems to propose, because that'll make banking more expensive. But the flip side is: why don't we just let megabanks go bust? If they go bust, the government steps in, briefly national…

"the government steps in, briefly nationalizes them, sells off the parts (the shareholders get nothing, of course), and life continues"

That's the solution I would have preferred in 2008, but the political system has shown it can't commit to that solution. You lose any support for that resolution plan from conservatives at "briefly nationalizes", because they're afraid any nationalization won't turn out to be brief at all. So nationalization is off the table, and we have to stumble through with bailouts.

Re: How to cut megabanks down to size

#22

Post by aaronblohowiak »

ataggart wrote: post #19
rwmj wrote: post #13

I'm confused by this. The large banks are (arguably) more efficient because of economies of scale, eg. less duplicated management, purchasing power. So it's probably not a good idea to limit the size of banks which is what this article seems to propose, because that'll make banking more expensive. But the flip side is: why don't we just let megabanks go bust? If they go bust, the government steps in, briefly national…

Per the article, size is correlated with problems but not the cause of them. It happens that large banks are the ones who are more likely to get bailed out, thus they are incentivized to take more risk, so they do. It is the potential for government bailouts/protections that is the root of the issue, thus the proposal is basically to stop doing that.

The problem is not the bailout, per se, the problem is that the bailout didn't wipe-out shareholder value (and executive compensation) in the process.

Re: How to cut megabanks down to size

#23

Post by raverbashing »

amalag wrote: post #20
raverbashing wrote: post #16

Earlier quoted context omitted.

Yes BUT it's also a form of "insurance". If there's a suspect a bank won't be able to honor deposits, bank run ensues, THEN the given bank can't honor deposits obviously, because no bank works like that today, that is: self fulfilling prophecy It's a necessary evil (for the customer's sake)

Credit unions don't participate in FDIC insurance, they have arranged their own private insurance. So it is not a necessary evil.

Insurance is a necessary evil, if it's backed by the government or by a pool of banks is a different issue

Re: How to cut megabanks down to size

#24

Post by druswick »

Another interesting way to think about "too big to fail" is as a considerable government subsidy. Banks operate in a risky environment. When there's a meltdown, the government steps in to bail the largest banks out. These banks are getting a free insurance policy from the government, a subsidy that's not going to the smaller banks.

Re: How to cut megabanks down to size

#25

Post by ataggart »

josephlord wrote: post #14
ataggart wrote: post #6

>small institutions must submit to the rigors of the free market. >market discipline has worked to keep smaller institutions on the straight and narrow, it has been ineffective with megabanks >market participants have proved [in]effective in monitoring risks at these [huge banks]. >They know they will be protected by a taxpayer rescue should a large institution teeter. How is this not obvious to everyone involved?

Smaller banks survived this crisis with relatively few failures but that has not always been the case (e.g. Savings and Loans crisis). However the fact that they can fail is critical and a sufficient reason to break them up even if it won't make them better. Banks that are too big to fail are too big to be allowed to exist. Government protection only for the commercial/retail part is an obvious but insufficient requi…

It's not clear to me how "bigness" matters. The article makes clear that small banks were exposed to disciplining market forces, but for large banks such forces were obviated by government protection. Worrying about size seems to miss the point.

Re: How to cut megabanks down to size

#26

Post by cynicalkane »

ataggart wrote: post #6

>small institutions must submit to the rigors of the free market. >market discipline has worked to keep smaller institutions on the straight and narrow, it has been ineffective with megabanks >market participants have proved [in]effective in monitoring risks at these [huge banks]. >They know they will be protected by a taxpayer rescue should a large institution teeter. How is this not obvious to everyone involved?

They are obvious and breaking up the banks is a popular topic of speculation in the finance industry. What's a mystery is why it is taking so long for mainstream econ and op-ed writers to catch on.

Paul Krugman, for example, proposed that big banks like Citibank provide value by having a huge service network, and therefore he's skeptical of breaking up banks. Which is true--Citibank's size is the primary (and probably only) reason I'm a Citibank customer. But the unstated assumption that there must necessarily a 1:1 ratio of Too-Big-To-Fail bunches of assets to bank service networks is baffling to me.

There seems to be a TBTF blind spot in the sphere of wide-area economic and financial knowledge; that is just one example. The solution is always "more regulation", or occasionally, "better regulation" with the implication that everything is the government's fault.

Re: How to cut megabanks down to size

#27

Post by natrius »

ttar wrote: post #9
ttar wrote: post #7

Start the Bank of the United States, cancel FDIC insurance. There problem solve.

FDIC is a form of privatizing the profit, while socializing the risks for the banks.

The FDIC is funded by banks. The FDIC did not have to use taxpayer dollars during the financial crisis. In practice, the FDIC has not been involved in these socialized risks you speak of, though if it ran out of money, the government would back it up.

The FDIC also provides public benefits, like avoiding economy-crippling bank runs.

It's a good thing.

Re: How to cut megabanks down to size

#28

Post by ttar »

raverbashing wrote: post #16
ttar wrote: post #9

Earlier quoted context omitted.

FDIC is a form of privatizing the profit, while socializing the risks for the banks.

Yes BUT it's also a form of "insurance". If there's a suspect a bank won't be able to honor deposits, bank run ensues, THEN the given bank can't honor deposits obviously, because no bank works like that today, that is: self fulfilling prophecy It's a necessary evil (for the customer's sake)

If you don't trust the bank, don't put your money there. Otherwise, put your money at the Bank of the United States, backed by and owned by the full faith of the US taxpayer.

I will not bail out private money making banks via the FDIC via my tax dollar.

If you put money into a private bank, then when it fails, you should lose that money.

Re: How to cut megabanks down to size

#29

Post by natrius »

amalag wrote: post #20
raverbashing wrote: post #16

Earlier quoted context omitted.

Yes BUT it's also a form of "insurance". If there's a suspect a bank won't be able to honor deposits, bank run ensues, THEN the given bank can't honor deposits obviously, because no bank works like that today, that is: self fulfilling prophecy It's a necessary evil (for the customer's sake)

Credit unions don't participate in FDIC insurance, they have arranged their own private insurance. So it is not a necessary evil.

Credit unions participate in the NCUA, which is decidedly not private.

http://www.ncua.gov/Pages/default.aspx

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