Small banks …

This post by Cetier on the RBNZ Financial Stability Report poses an interesting question about the future of small banks. He notes that the big banks seem to be doing fine but that small NZ banks are struggling to cover their cost of capital. This disparity between big and small banks also seems to be feature of the Australian banking system. It also looks like big banks in the USA are getting bigger at the expense of the small banks.

There is a perennial question of whether small banks need some support (possibly in the form of less onerous regulation) so that they can offer a source of competition to the larger banks. This is a policy choice that the USA has very deliberately made but it has been argued that this is one of the factors that contributed to the recent spate of bank failures.

This is part of a larger conversation about the tension between competition and financial stability. Marc Rubinstein did a good post on this question which I covered here.

I don’t have any answers but the question is one that I think will get more focus as the US considers its response to the most recent case studies in why banks fail. I don’t have enough expertise on the US Banking system to offer an informed opinion but the Bankers Policy Institute does offer an alternative perspective that argues that the failures were more a question of bad management and lax supervision than of regulation per se. I can say that the risks these US banks were running did seem to clearly violate the principles of Banking 101.

Let me know what I am missing …

Tony – From the Outside

Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

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