Breaking up the Banks or Too big to be broken up..?
Some very interesting events in the financial news appeared to have dust off the path to a bank breakup.
However, we have recently seen voices being risen for more regulation in the financial sector. The roots of these claims are quite easy to identify - more financial scandals have been revealed lately ( JP Morgan and the London Whale, the LIBOR, tremendous bonuses package given after the GFC..) and the sector seems not to have learnt much from its mistakes and still has many blunders to be fixed. Even Sandy Weil, former CEO of the gigantic Citigroup, has said to be favourable to a bank breakup - stating that "(we should) have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail."
The main advantage of a bank break - up is quite obvious : no more "Too big to fail", in other words bailouts would no longer be necessary to save Banks if those have made "bad bets". Jamie Dimon, CEO of JP Morgan Chase - one of the biggest financial institution of the US and the World - revealed during its hearing of the $5.8 billion "London whale" trade loss the difficulty of clearing position of a such scale. The actual size of banking conglomerates puts extra pressure on clearing trades - the bulk positions that those banks take because of their "balance sheet" size - make it difficult for them to close these positions because of market liquidity. Hedging - more or less taking risk-off on a trade by taking another position - is even more complicated when trades are amounting to billions of dollars (see what Dimons says at 3.00) :
Globalization and the concentration in the financial industry has led to an odd facts : many European banks are now bigger than countries :
On the other hand, a regulation to break-up banks is quite complicated to make and would most likely take years to be put in place. On top of that, some bank CEOs and other economists question the real efficiency of a bank break-up. What are their arguments? According to former U.S senator Chris Dodd on CNBC, breaking up the bank is not the solution. In the short-run, it seems obvious that the banking sector would be substantially less profitable if it was to be broken up in two parts. In fact, the participation of banks in both investment & commercial banking enable them to lower costs (the funds banks need to invest come largely from client's deposits with economies of scale on top of that - even if this is to be restricted by the Volcker rule i.e proprietary trading rules). In addition, being part of the investment business can be seen as an incentive for commercial banking to lower interest rates - obviously having a stake on companies profits and the overall economic performance can be a reason enough for banks to discount loans or at least not to "make too much" profit out of it. If US banks are eventually split, they will lose a part of their business activity and European banks, who do not have to be split between commercial and investment banking departments yet should logically benefit from the US split.
If a bank split up can definitely bring on many advantages in terms of risk management for individuals and countries economic stability, it will take a long time to be implement. It is not really about how big and how complete the regulation is in the end but about how efficient it is.
Is the financial sector too big? Indeed those last two graphs would need to be compared to some other countries since "developed" countries financial companies' have obtained market share from developing countries (which would explain for the increase on both exhibit) but it is still very interesting to take a look at it :
J.L
In the wake of the GFC and the numberous financial scandals tied to it (Lehman Brothers and the subprimes, Goldman Sachs,AIG..), a strong wave of popular discontent affected the financial sector. Investment banks were pointed out as responsible for the GFC because of their always more dicey bets jeopardizing current accounts of billion of individuals and threatening economies on a broader scale. After massive growth stimuluses of governments and the bailing out of many banks and financial institutions over the world, growth timidly restored confidence into the financial markets. Except few attempts in Europe to regulate markets (such as the Mifid), nothing much came out of our "uninspired" regulators.
However, we have recently seen voices being risen for more regulation in the financial sector. The roots of these claims are quite easy to identify - more financial scandals have been revealed lately ( JP Morgan and the London Whale, the LIBOR, tremendous bonuses package given after the GFC..) and the sector seems not to have learnt much from its mistakes and still has many blunders to be fixed. Even Sandy Weil, former CEO of the gigantic Citigroup, has said to be favourable to a bank breakup - stating that "(we should) have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail."
The main advantage of a bank break - up is quite obvious : no more "Too big to fail", in other words bailouts would no longer be necessary to save Banks if those have made "bad bets". Jamie Dimon, CEO of JP Morgan Chase - one of the biggest financial institution of the US and the World - revealed during its hearing of the $5.8 billion "London whale" trade loss the difficulty of clearing position of a such scale. The actual size of banking conglomerates puts extra pressure on clearing trades - the bulk positions that those banks take because of their "balance sheet" size - make it difficult for them to close these positions because of market liquidity. Hedging - more or less taking risk-off on a trade by taking another position - is even more complicated when trades are amounting to billions of dollars (see what Dimons says at 3.00) :
Globalization and the concentration in the financial industry has led to an odd facts : many European banks are now bigger than countries :
On the other hand, a regulation to break-up banks is quite complicated to make and would most likely take years to be put in place. On top of that, some bank CEOs and other economists question the real efficiency of a bank break-up. What are their arguments? According to former U.S senator Chris Dodd on CNBC, breaking up the bank is not the solution. In the short-run, it seems obvious that the banking sector would be substantially less profitable if it was to be broken up in two parts. In fact, the participation of banks in both investment & commercial banking enable them to lower costs (the funds banks need to invest come largely from client's deposits with economies of scale on top of that - even if this is to be restricted by the Volcker rule i.e proprietary trading rules). In addition, being part of the investment business can be seen as an incentive for commercial banking to lower interest rates - obviously having a stake on companies profits and the overall economic performance can be a reason enough for banks to discount loans or at least not to "make too much" profit out of it. If US banks are eventually split, they will lose a part of their business activity and European banks, who do not have to be split between commercial and investment banking departments yet should logically benefit from the US split.
If a bank split up can definitely bring on many advantages in terms of risk management for individuals and countries economic stability, it will take a long time to be implement. It is not really about how big and how complete the regulation is in the end but about how efficient it is.
Is the financial sector too big? Indeed those last two graphs would need to be compared to some other countries since "developed" countries financial companies' have obtained market share from developing countries (which would explain for the increase on both exhibit) but it is still very interesting to take a look at it :
J.L
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