Economics, Pethokoukis

Do big banks make economic sense?

Economist Simon Johnson thinks the Fed’s Daniel Tarullo is hinting the central bank may cap bank size. By all means, read Johnson’s Bloomberg column on the topic. But in the piece, he also mentions a speech by the Bank of England’s Andrew Haldane on banking reform. In the speech, Haldane cites some fascinating BofE research:

Bank of England research has re-looked at the evidence on economies at different banking scales. As Chart 8 shows, in standard models there is evidence of scale economies for banks ith assets above $100 billion. Indeed, these economies tend to rise with banking scale.

But this finding is based on estimates of banks’ funding costs which take no account of the implicit subsidy associated with too-big-to-fail. Removing this subsidy raises banks’ funding costs, lowers estimates of bank value-added and thereby reduces measured economies of scale. As Chart 9 shows, once an allowance is made for the implicit subsidy, the picture changes dramatically. There is no longer evidence of economies of scale at bank sizes above $100 billion. If anything, there is now evidence of diseconomies which rise with bank size, consistent with big banks becoming “too big to manage”.

Another data point suggesting that banks are big because of government policy, not market forces.

One thought on “Do big banks make economic sense?

  1. I do not think that the study scrutinizes whether there are scale economies in asset generation with larger banks. After all, large banks can make a $500 million loan and keep it in their portfolios. Smaller banks must syndicate the loan or else they are shut out of the large asset market.

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