Tuesday, January 26, 2010

Smaller Banks

I'm watching with interest as the media is focusing this week on the issue of reducing the ability of banks to drag national economies down when/if they fail.

President Obama's provocative statement that he intends to take action in this area has coincided with British ministers making noises about the issue as well.

In Britain, attention seems almost exclusively focused on taxing banks or requiring them to take out insurance against collapse, so that the tax payer does not have to bail them out again. Most of the discussion on the issue at present seems to be about how to get the banks to spend money protecting themselves.

There is an alternative approach, which I have not heard many explore publicly so far. It is that the actual size of banks be dramatically reduced through legislation. Although this does not, of course, guarantee that a bank will never fail (small banks can overreach themselves), it does at least, by distributing the power of the banks much more widely, reduce the prospect of any one of them being able to hold a national economy to ransom in the way that the large banks did in 2008.

Imagine, for instance, instead of the government owning 84% of RBS, if this bank were broken up into very small units - some as small as single local branches - that were sold off as going concerns. The tax payer would be repaid, the bank(s) would emerge as viable businesses and the national debt would be reduced.

Just a thought.

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