What's So Great About Having Really Sound Banks, Anyway?

by: Paul Kedrosky

Is having the soundest banks in the world something to brag about? I'm not convinced. Bear with me on this, as I'm semi-serious.

Think of it this way: You certainly don't want the least sound banks in the world. Those are disastrously unhelpful in doing anything useful in a modern economy. The list of such bad bank [ed., the other kind of bad banks] countries is currently led by Algeria, Libya, Lesotho, Kyrgyz Republic and East Timor. You end up with bank failures and lousy credit. It's the worst of banking worlds.

You don't even want average banks. We're terrible at assessing bank risks, so being of average soundness is only another way of saying that the fuse is lit, but we just don't know how long till it goes boom. Banks in the middle of the pack aren't really in the middle of the pack; they're actually languishing at the back if you take a long enough view.

So, do we want the soundest banks, in some Consumer Reports of soundness sense? The appeal is obvious, especially at times like this. Fewer bank failures, less nervousness among the populace about bank runs, and a general sense that whatever else may be wrong in said country, the banks aren't one of them.

It is seductive, but I'm not convinced. After all, to be the best bank you have to take as little risk as possible, so little risk that no-one else is taking less risk, at least in a soundness sense. You have walked way out the safety curve, so far that you are the soundness champignon [ed., No anti-French Top Gear allusions please].

t-shirt.pngBut isn't that a species of winner's curse? By deciding to focus so much on soundness you are harshing bank mellow with respect to doling credit and generally doing stuff. Granted, you don't need to take that much risk to cause calamitous collapses in your banking system, but do you really need to hunker down all the way out in the anti-doom bunker with its thick walls of ... safety or something?

So, who do you really want to be in banking terms? Canada has, according to itself and various studies, the soundest banks in the world. But Sweden follows close behind, then Luxembourg and Denmark. I'm arguing that you should prefer Swedish banks, or even Danish ones to Canada's. Being the soundest bank is, to this way of thinking, only for weenies -- or maybe just something to put on t-shirts.