Bank Concentration Essay example

Submitted By Merguimond1
Words: 449
Pages: 2

"Further bank concentration will strengthen the US banking system."

In light of the recent crisis, the surest way to strengthen the US banking system is not to further bank concentration, but to restructure it in a way that reduces the size and complexity of the largest banks, thereby ending the “too-big-to-fail” problem.

The safety nets provided by the government to the banking system (primarily lender of last resort and deposit insurance) causes moral hazard and may lead to bank managers taking on too much risk. But that’s not the only problem. Because government officials are obsessed with avoiding financial crises, they pay close attention to the largest institutions. While the failure of a small community bank is unfortunate, the prospect of a large financial conglomerate going under is a regulator’s worst nightmare. The disruption caused by the collapse of an institution that holds hundreds of billions of dollars in assets is too much for most people even to contemplate. Before Lehman Brothers, another entity whose collapse promised to jeopardize the entire system was the hedge fund Long Term Capital Management (1998). In effect, some banks become “too big to fail” or “too complex to manage.” The managers of these banks know that if their institutions begin to fail, the government will find a way to bail them out. The deposit insurer will quickly find a buyer, or the government as lender of last resort will make a loan. Depositors will be made whole, and the managers of the bank may not even lose their jobs.

The government’s too-big-to-fail policy limits the extent of market discipline depositors can impose on banks. A corporation with millions in deposit is concerned about the riskiness of its bank’s assets, given the limits of government deposit insurance (over $100,000