Shrink the banks?

November 6, 2012

Another one from the IGM Forum:

The US government should make further efforts to shrink the size of the country’s largest banks — such as by capping the size of their liabilities or penalizing large banks more heavily through taxes or other means — because the existing regulations do not require the biggest banks to internalize enough of the “too-big-to-fail” risks that they pose.

Does that sound right to you — or not?  The statement gets reasonably strong support from their panel of economists: 54% either agree or strongly agree; 35% are uncertain, have no opinion, or didn’t respond; and only 10% disagree.

Update (Nov 8):  I should have done this before, but I just read the comments.  Among them:  Darrell Duffie:  “I am open minded about a size cap, but before taking this action, I think more research should be done on unintended consequences.”  Austan Goolsbee:  “it wasn’t really size that made them dangerous. it was interconnection. derivatives, resolution, and consolidated supervisor > deposit size.”  Bob Hall:  “Limiting assets is largely ineffective because banks can take similar risks and earn similar returns using swaps rather than holding assets.”  Bengt Holmstrom:  “Very unclear how far to go. Was too big to fail the problem in Canada? In Europe? Expansion triggered by regulatory change the big problem.”  So it seems to me there’s more disagreement with this statement than the raw numbers suggest.


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