Mercatus Center's Miller: Let's Learn to Love Big Banks

Wednesday, 27 Aug 2014 07:56 AM

By Michael Kling

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It's "absurd" for Washington to be debating how large banks should be, argues financial markets scholar Stephen Matteo Miller.

Some politicians and regulators appear determined to shrink big banks, Miller writes in an article for American Banker.

"But doing so could hurt Americans who appreciate big banks' geographical reach and wide range of services," warns Miller, a member of the Financial Markets Working Group with the Mercatus Center at George Mason University. "The best way forward is to let people vote with their feet, allowing banks to compete to offer the best service. . . . The decision should not involve politicians and regulators."

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While some customers may be satisfied with a local community bank, others prefer large national banks. They are inconvenienced if the have to switch banks if they move to another state or even another part of their state.

For politicians and regulators, bank size and complexity go hand in hand. Large banks tend to engage in more complex financial instruments, such as collateralized debt obligations, that were instrumental in causing the 2008 financial crisis.

However, complexity and bank size are two different issues, Miller stresses.

"This is why some regional banks, like PNC, can credibly challenge the 'systemically important financial institution' or 'SIFI' designation, on the grounds that they were not involved in the recent crisis," he explains.

"To address complexity, how about simplifying banking regulations by simply raising capital requirements even more, as many advocate in various forms? Likewise, to address size, how about letting customers decide how big their banks should be?"

Many politicians, regulators and small banks want us to fear big banks. But the growing regulatory burden prompted by the Dodd-Frank Act should be the larger fear, Miller argues. That increasing burden is increasing the cost of banking, and those costs will mean fewer services, fewer branches and higher fees for customers.

Most commentators believe big banks should shrink or even be broken up in order to prevent another financial crisis and more government bailouts.

Regulators can now break up large banks without additional authority, asserts Fiscal Times columnist David Dayen. Regulators recently rejected the banks' proposed "living wills," their plans for orderly dissolution should they become bankrupt. The Dodd-Frank Act gives the Federal Reserve and FDIC wide latitude to transform the banking industry, he says.

"It's quite unclear whether the Fed, in particular, would grab this opportunity."

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