Stiglitz on Big Banks
Joe Stiglitz visited the World Bank yesterday and talked about needed changes to fight future crises. One controversial thought that has some merit: break up big banks so they do not pose a "too big to fail" risk.
There is anyhow a market-based movement in that direction. The days of the "supermarket bank" are over. It is not obvious what this huge diversification in the last 15 years has brought in the way of benefits. At least there are no studies I am aware of that make this case in a compelling way. More importantly, it is a lot more difficult to regulate and supervise big banks.
The question is who has enough power to break up the big guys. Noone in the US. Too cosy of a relationship with the regulators (says Stiglitz). What about Europe? Not clear either. In all likelihood, this idea will go the way of Stiglitz's super-bankruptcy idea: nowhere. Still, good someone is thinking.
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Simeon, how does your thought apply to huge transnational financial conglomerates owning banks in many emerging economies. Should these be broken down along the national market lines? Should their Bulgarian subsidiaries become Bulgarian again? There were quite some benefits of FDI in emerging market banking...
There might be no power to break up big banks in national economies, but it may be easy to break up transnational banks. The European Commission is - under the competition rules banner - pushing for transnational banks that receive state aid to sell their foreign subsidiaries. 'Deglobalizing' large banks is a way of making them smaller.
Posted by: Zdenek Kudrna | Apr 30, 2009 2:31:26 AM
@ Zdenek
In my view deglobalization of the banking sector will be one major by-product of this crisis. The main reason: banks now are international in life but national in death. In other words, if a bank goes bust the host government is left with the mess. So it would be natural for central bankers and finance ministers to require more national regulation and control over foreign subsidiaries. Which, in turn, will make globalized financial services less attractive.
So, in short, the answer to your question is Yes. However, it is not clear that you even need government action in this. It will happen naturally.
By the way, Willem Buiter has written extensively on this topic and I draw my thoughts mostly from reading him.
Posted by: Simeon | Apr 30, 2009 9:38:58 AM