What are big banks good for?

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Politics,Beltway Confidential,Timothy P. Carney

Being a big business isn't a bad thing, in itself. It can often be a good thing.

Wal-Mart, for instance, uses its size to negotiate lower prices from suppliers, and thus provide lower prices to consumers. It also uses its size to provide a broad pool of workers so that it can self-insure its employees' health, knocking out the middle man.

Size allows banks to do things like distribute risk, build great online banking, and put ATMs and branches everywhere you could possibly want one. But maybe after a certain size, there's not much economic advantage to banks' being bigger. Jon Huntsman sounds this slightly populist-sounding note in his Wall Street Journal op-ed today:

More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.

Free-market writer Arnold Kling wrote in National Review last year: "our present large financial institutions probably owe their scale more to government policy than to economic advantages associated with their vast size." In other words, the reason we have big banks is because they gain advantages (like lower borrowing costs and added lobbying leverage) from the government's stance that they are too big to fail.

That's why, rather than a complex set of regulations subject to gaming by the big banks hiring up the Greg Craigs and Peter Orszags of the world, I think it might be smarter to curb the size of banks. Hunstman suggests a fee for big banks. Maybe deny them access to FDIC insurance or the Fed Discount Window.

But stop pretending the big banks' bigness has anything to do with their merit in providing value.

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