The good, the bad and the big

Are banks too big? Should they be downsized or chopped up in smaller parts? The consensus seems to be “yes”, but is the consensus right? This is the topic of “The good, the bad and the big: is there still a place for big banks”, a book chapter by Wilfred Nagel, CRO of ING Group, and myself, published in SUERF-study 2014/2 “The value of banks and their business models to society”.

We argue that there are valid reasons for banks to grow bigger, such as gains in efficiency, profitability and diversification. But bigger banks may also be more difficult to manage. That is in itself no reason though for intervention by policymakers. Size diseconomies will affect the return on equity, which is first and foremost a concern for shareholders.

The one reason for policymakers to care about bank size and intervene, is “too big to fail” (TBTF) and the ensuing taxpayer risk. But banks and regulators are currently implementing far-reaching changes that much reduce the chance taxpayers ever have to step in again. TBTF is being addressed effectively by Basel-III, a clear liability seniority ranking and Recovery and Resolution Plans.

We therefore advise policymakers to avoid overshooting. Do not overreact by striving to eliminate or split each and every big bank. Instead, we argue that both financial stability and the economy are best served by a diverse banking landscape inhabited by different types of banks.

The full text can be found in chapter three of SUERF-study 2014/2 (pdf).

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