Thursday, May 27, 2010

Smaller Banks Are ‘No Safer’

May 24, 2010, 2:25 PM


By DAVID LEONHARDT, New York Times

Writing at Vox, four Italian economists argue that big banks weren’t the problem:
A world with only small and domestic banks is no safer. … [Such banks] also had to be supported because of bad investment policies. Examples include Northern Rock in Britain and WestLB in Germany. Moreover, the key “raison d’être” of multinational banks – i.e. being able to mobilize funds across countries – could in principle be extremely useful to support global operations in times of distress and not necessarily be a cause of instability.
The riskiness of a bank’s holdings, not its size, seems to be the most important issue. In this country, that helps explain why Lehman Brothers — which was not a huge firm — was able to cause such enormous damage. I think the financial regulation bills favored by the White House and Congressional Democrats have their flaws. But the failure to break up the big banks doesn’t seem as if it should be at the top of the list.
Hat-tip to Marginal Revolution. (And, speaking of Marginal Revolution, Tyler Cowen had a nice column about Greece in Sunday’s Times.)