From Tuesday’s Wall Street Journal:
Some, like Citigroup Inc. and Bank of America Corp. have embarked on diets of their own. On the whole, though, the financial system is more concentrated than before the crisis.
And Santander, the largest Euro-area bank with 32 million depositors across the Euro area, is buying up smaller banks. Tuesday’s WSJ again:
[Spain’s banking] sector is concentrating into fewer banks, with larger, healthier banks absorbing weaker ones, often with help from the government.
In the wake of the crisis the Too Big To Fail problem has grown across the rich countries. When something happens always and everywhere we should start looking for underlying laws. We’re not at “always and everywhere” here but it’s getting close: Time to theorize.
I don’t think political influence from big banks is a major reason for the recent rise in bank size. Political influence is a constant, like gravity, so the question is what changed after 2008. Why the rise in bank concentration just as economists, policymakers, and politicians became more worried about bank concentration?
It sounds to me like an interaction between hyperbolic discounting (impulsivity, short term impatience in the government sector) and time inconsistency (depositors know the regulator will cave later so depositors put more money in TBTF banks today, making it even more tempting for the regulator to cave).
When you’ve got a small weak bank RIGHT IN FRONT OF YOU it seems like you should make that bank as safe as possible: And the way to make it safe is to lump it together with a bank that will get a bailout if things go bad at some point in the future.
And in the future, when things go bad, you know that you or your successor will likely cave since the suffering will be RIGHT IN FRONT OF YOU. And part of the reason you’ll cave is because the bank has grown so big. It’d be irresponsible to create systemic risk in the name of some abstract ideal like “market efficiency” when short-term macroeconomic stability is at stake. Today’s temptation makes tomorrow’s bailout more likely than ever.
This is just one channel, others are at work. But I think hyperbolic discounting by bank regulators is a big problem for bank regulators. One way to end that problem is by putting a lock on the liquor cabinet with loophole-free legislation that forbids bank acquisitions by the biggest banks. No “unless in the judgment of FDIC the public interest would be served by such an acquisition,” no “final rules implementing this legislation shall be passed no later than January 1, 2018,” nothing like that. Just a ban, now.
If legislators enact such a ban, then in the future a tiny number of well-informed policy experts will be quite grateful. I hope legislators have a great desire for praise from such people.