Some musing from John Hempton at Bronte got me thinking about the twin poles of the future of banking. To borrow some of John’s phraseology, there are two camps:
- Small and smart banks. This camp wants to create lots of small banking baskets, with none being big enough to cause systemic problems if one fails.
- Big and dumb banks. This camp (which John is in) wants fewer banking baskets, but all of which are watched much more closely. This view is driven by the id
The arguments for the former largely have to do with eliminating systemic risk from banks that are "too big to fail" while maintaining competition; the arguments for the latter have to do with easier banking oversight and lessened competition-driven incentives for banks to run amok and destroy the world. In the latter case we would end up with a few very large banks in the U.S., all of which would be too big to fail, for practical purposes.
Here is John using Australia to make his case (but he could equally have used Canada), one that is similar in some ways to Nassim Taleb’s call for banks as utilities:
It was the competition that caused things to blow up.
The counterfactual is Australia. Australia is very similar to America – except that the consumer was even more in debt. Our credit card industry was bigger (relative to GDP) as were our mortgages. Our car loans were substantially lower. But the consumer here was also fairly close to hocked out.
However our banks are solvent. There is only a remote chance that they will become insolvent despite a property boom that makes America’s look modest. They are solvent despite not being well run. Indeed they are famously bureaucratic and inept. I once worked for one after having worked for the government. I can assure you the government department I worked for was far more competently run.
The banks survive because they are just so profitable. They are profitable despite being in an economy that should be sour (from indebtedness).
Thoughts?
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