1/10/2024 0 Comments Unions in small vs big business![]() Is the Fed really going to allow mass failures among small banks to threaten financial stability? Hardly. The US's small banks, individually, are not too big to fail. Most of them are publicly owned and have strong political support. And they benefit from not only implicit, but explicit sovereign backing. German regulators allow these loans to be accounted for as loans between subsidiaries of a holding company, so they require no capital allocation - a practice which the IMF has criticized. They are also highly interconnected: they all lend to each other and guarantee each other's loans. But they are dangerously connected with the damaged Landesbanken: had the German government allowed the Landesbanken to fail, there is little doubt that swathes of Sparkassen would have failed too. The German Sparkassen are collectively too big to fail. "Too big to fail" is not limited to large banks. ![]() If they are interconnected and/or systemically important because of market concentration, they will be bailed out even if they are tiny. ![]() This is why, historically, small banks have often been bailed out. But a lot of small banks all failing together can create as much systemic risk as a large bank failing. Of course, unlike large banks, individual small banks can fail without putting the system at risk if there is an effective resolution authority such as the US's FDIC: the EU could learn much from the way FDIC does things. Small banks are not "safer" than big ones. And the burst property and construction bubble in Spain bankrupted many of its regional banks and very nearly the sovereign, too. The German Landesbanken, which were severely damaged in the financial crisis, remain weak and under-capitalized despite sovereign bailout. Many of the UK's building societies also got into trouble and were bought out by other institutions, and credit unions and small banks have been failing at the rate of about one a month. More recently, the US has seen literally thousands of small banks fail in the aftermath of the financial crisis. Even then, interconnectedness, not size, was the principal cause of systemic risk. And in the UK, the Secondary Banking Crisis of 1973-5 was a disastrous wholesale run on small unregulated property lenders: the Bank of England bailed them out because they were putting the UK's large clearing banks at risk, threatening the financial system. But they really should remember the Savings & Loan crisis of the 1980s and 90s, when hundreds of thrifts failed due to a poisonous combination of rising interest rates, unstable funding and high-risk mortgage lending, bankrupting the Federal Savings & Loan Insurance Corporation and forcing the Government to bail them out. Americans seem to have forgotten the widespread bank runs that forced FDR to declare the famous "bank holiday" in 1933. The "small banks good, big banks bad" meme simply does not fit the facts. They can become too reliant on unstable wholesale funds and lend too much at too high a risk. Small local banks are widely believed, with some justification, to be more effective providers of finance to local businesses than large national or international banks, because local knowledge makes their staff better able to assess risk, and proximity to households and businesses makes them better able to manage relationships.īut small banks can behave just as badly as large ones. Small banks serve the economy well: they provide reasonably safe places for savings and are a source of essential finance for households and businesses. And the German Finance Minister defends the Sparkassen, Volksbanken and Landesbanken against EU attempts to bring them into the system of European bank regulation just being devised, on the grounds that only big banks with cross-border liabilities need international regulation. ![]() ![]() The Archbishop of Canterbury suggests that one of the UK's big banks should be broken up to create a system of regional banks. The Move Your Money campaign in the UK tries to persuade people to move their money from big banks to smaller ones. Felix Salmon thinks small banks are best. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |