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More Banking Regulation Will Lead To Bigger Banks

by | 20th, October 2011

MORE banking regulation will lead to bigger banks. There’s a certain, umm, tension, shall we say, between the various things that people are calling for over the banks.

On the one side everyone seems to agree that we’ve got too few really large banks. We should instead have a lot more but smaller banks so that they’re not too big to fail. Smaller banks, one goes bust, well, shareholders lose their money and the rest of us carry on. If we’ve only a few very large banks then one goes down and the entire financial system collapses into a pile of smoking rubble.

So, more but smaller banks please.

Can’t see anything wrong with that myself.

Then we’ve also got people, very often the very same people, shouting that we need more regulation of the banking system. More checks on what they can do, more rules telling them what they can’t do. And again, can’t say that in principle there’s all that much wrong with that. However, we do get to a problem if we want to have both of these things:

Substantively, the most interesting thing I heard was said by Morgan’s head of commodities, Blythe Masters.  She noted that F-n-D imposed huge compliance and administrative burdens.  Huge.  Moreover, these are fixed costs.  So Frank-n-Dodd increases economies of scale in banking, which will favor the big over the small, and encourage the big to get bigger and the small to go away.

In other words, something ostensibly intended to address too big to fail will encourage big banks to get bigger through regulation-induced scale economies. The effect will be the exact opposite of the intent.

OK, so the Dodd Frank rules are something that the septic banks have to deal with but the basic idea is the same. If you’ve got lots of regulations you’ve got to obey then you’ve got to have a big regulations department to make sure all the regulations are obeyed. And only large organisations can afford that. So, by having lots of regulations we’ll push banks into being larger at the same time as we say that we’d like smaller banks.

No, there is no solution to this problem either. We can either have more regulations or we can have smaller banks. Just choose would you?



Posted: 20th, October 2011 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink