Small banks in trouble are not necessarily less of a problem than their larger counterparts
It was bound to happen. After pouring tens of billions of dollars, pounds and euros: as much as 5.5 per cent of the GDP of advanced economies, according to the International Monetary Fund, governments began to revolt. “If a bank is too big to fail, then it is too big,” the governor of the central bank of Belgium told a newspaper at the end of June. If this is true, then what about the corollary: “Small is beautiful?” If bankers’ bonuses are being capped, should the size of their banks be capped as well?
INSEAD Professor of Banking and Finance Jean Dermine thinks not. And he has some 25 years of research to back it up. “There are two arguments against capping the size of banks,” he says. “The first is, in order to have the economy of scale in the financial sector to service large domestic corporate clients, you must have a large international bank. The Netherlands have Unilever and Shell, for example, and these companies do business around the world.”
[This article is republished courtesy of INSEAD Knowledge, the portal to the latest business insights and views of The Business School of the World. Copyright INSEAD 2024]