Do economists think smaller banks would cut risk?

Sep 01, 2016

Sections Economics

Collections Financial Contagion

Much has changed on Wall Street since the 2007–10 financial crisis. Banks are subject to higher capital requirements and undergo regular stress tests. But the world’s largest financial institutions have grown since the crisis, swallowing up former rivals and smaller lenders. That has led to renewed calls to break up the global banking titans. One-third of the economists who make up the Initiative on Global Markets’ Economic Experts Panel thought that capping banks’ size would cut risk, while only 12 percent disagreed. But many were uncertain, and even more of them were unsure that a cap would benefit average Americans.

Markus Brunnermeier, Princeton
“Troublemakers Lehman & Bear Stearns were smaller banks. On the other hand, smaller banks are easier to dissolve and less political influence.”
Response: Uncertain

Barry Eichengreen, UC Berkeley
“‘Too big to manage’ can be a problem. Not the only problem of course. Small banks can also fail, threatening financial stability.”
Response: Agree

Oliver Hart, Harvard
“With banks being smaller, no single bank’s failure would lead to serious contagion or undermine the confidence of investors and depositors.”
Response: Agree

Anil K Kashyap, Chicago Booth
“Shadow-banking risks would grow substantially if we go this route, and we already saw that they were at the heart of the last crisis.”
Response: Disagree

 

Daron Acemoğlu, MIT
“Against the benefits of lower systemic risk there is the loss of business to other financial centers. Global regulation would be better.”
Response: Uncertain

Judith Chevalier, Yale
“There are clearly some countervailing benefits to size.”
Response: Uncertain

Darrell Duffie, Stanford
“A 4 percent cap might be OK for now, but too low later, causing distortions. Require instead higher minimum capital ratios for larger banks.”
Response: Disagree

Kenneth Judd, Stanford
“I have antitrust concerns. If a bank’s 4 percent is concentrated in one region, then it may have excessive market power.”
Response: Uncertain