Wednesday, March 7, 2001

Beware of bank consolidation (An early manifesto against too big too fail and hard to govern banks, and against too few bank regulation criteria)

Every day there are fewer banks in the world. Those horror stories about bank clients trying to discuss with anonymous voices on the phone about fraudulent uses of their credit cards, while trying desperately to sound as innocent as they are, should make us think twice about the possibility that someday we will, in the best Kafka style, have just one bank. 

But apart from these experiences sometimes worthy of a Stephen King, bank consolidation, a trend that we have been sold as a marvel, may contain other risks not discussed enough - or happily ignored. Among these the following: 

Low risk diversification: Whatever the authorities do to ensure the diversification of banks, there is no doubt that fewer banks mean lesser baskets where to carry the eggs. When I read that during the first four years of the decade of the 30’s in the United States, a total of 9,000 banks failed- I wonder what would have become of that country if it then had only one single bank. 

The regulatory risk: Before there were many countries and many ways of how to regulate banks. Today, with Basel proudly issuing rules that should apply worldwide, the effects of any mistake could be truly explosive. 

Excessive similarity: Encouraging banks to adopt common rules and standards, is to ignore the differences between economies, so some countries end up with inadequate banking systems not tailored to their needs. Certainly, regulations whose main objective appears to be only to preserve bank capital, conflict directly with other banking functions, such as promoting economic growth, and democratize access to capital. 

Low diversity of criteria: A smaller number of participants, less diversity of opinion and, with it, increased risk of misconceptions prevail. Whoever doubts, read the dimensional analysis that ratings agencies publish. 

Backlash: The development of decision-making processes has benefits but also risks. Thus we see that the speed of information itself, which promotes quick and immediate response, can exacerbate problems. Before, those who took the problem home to study it, and those who simply found out late, provided the market a damper, which often might have saved it from hurried and ill-conceived reactions. 

Few clear benefits: To date we have not seen a foreign bank grant for example mortgage loans with globalized terms of maturity and interests. In this respect there seems not to be so many clear benefits of a global bank, when it operates only replacing local banks. 

Cost of global aid: When banks in Venezuela suffered their last crisis, among other reasons because of buying other banks at inflated prices, the cost of that was sadly but logically paid by our country. Today, with globalized banks, and which are not immune to commit equally dumb things, like also buying banks at excessive prices, who will then pay the bill? 

Today, when the world seems to be asking much for bank mergers or consolidations, I wonder if we on the contrary should be imposing on banks special reserves depending on their size. The bigger the bank is, the worse the fall, and the greater our need to avoid being hurt.