Against Big, Public Banks

Alexander Campbell is beginning to think that publicly-listed banks might not be such a good idea after all:

The UK's mutual building societies spent decades being humdrum, unexciting, unambitious - and solvent. Then they all demutualised, as more than one recent conference attendee from a major bank pointed out to me, and what happened to them? To Abbey National, Bradford & Bingley, Halifax, Midland, C&G, Alliance & Leicester, Woolwich, and, of course, Northern Rock? Bought up or shut down, almost to a man... Where you need physical capital - in manufacturing, for instance - tapping the equity market is indispensable. But isn't it now becoming increasingly obvious that easy access to vast amounts of (apparently) freely flowing capital -through the equity or the wholesale markets - has in fact been a huge temptation, rather than a boon, for banks? ... A bit more of "the common ownership of the means of production, distribution and exchange" might not be such a bad thing for the financial sector.

There's a strong case to be made that banks, like law firms, should be boring and conservative and reasonably small and mutually-owned. That's one of the thing which worries me most about TARP and the $140 billion tax break being used to encourage huge banks to get even bigger still. The fact that all those huge banks are publicly-listed and therefore prone to taking excessive risks only makes matters worse.

The single biggest reason why we need extra banking regulation is that the big public banks can't be trusted to regulate themselves. The smaller, mutual banks, by contrast (in the US, they're mainly credit unions) have shown themselves to be much more trustworthy. It's a good model to bear in mind.

Comments

[Roger Knights:]

On target again. (How about YOU for Treasury Secretary?)

2008 Nov 18 11:25 AM

[Robert Nabloid:]

Absolutely correct. Banks should be boring and conservative. My bank was, and my bank is fine! Although there are very few banks in Canada, we have regulations that make lending stricter and the banking system is very conservative and boring. Yes, a few of our banks bought US sub-prime mortgages as an investment (whoops!), but our banks didn't do the massive amount of sub-prime lending and largely avoided that mess.

The government is picking and choosing winners - and instead of rewarding the conservative banks that deserve to be rewarded, the government is rewarding the risky large banks who now act like they are "too big to fail" and know that they can take on extra risk - after all, the government has their back.

The funny thing about this is that some of the banks that received bail-out money so they can start lending again are actually planning on buying out smaller more conservative banks with that money.... fair? Nope.

2008 Nov 18 06:00 PM

[derryl:]

I agree with the principle that small scale privately held banks are more likely to manage money prudently than large public banks. Private banks are free market businesses in the ordinary sense. They have limited means and to stay in business they have to mind the store. Some will be lucky and get away with bad moves. Some will be unlucky and suffer from unpredictable events. But for the most part good business will prevail and bad business will go under.

Canada's large public banks and branch banking system is a little different story. A significant portion of bank shares are held by institutional investors like pension funds who demand low risk even if that means unspectacular returns. Even when they wanted to expand and merge/acquire, Canadian banks were prevented both by their owners/stockholders and the federal government. Luckily these conservative constraints prevented Cdn banks from overextending into high risk/high reward and ultimately failed investments.

Canada's Finance Minister is now enjoying bragging rights and offering the Cdn system as a model of prudence for the G20 to emulate. But really, Cdn banks just got lucky, and were constrained in spite of their ambitions. I don't think human nature can resist jumping on what looks like a gravy train so the checks and balances that happen to exist in Canada have served Cdn banks well.

2008 Nov 19 09:53 AM