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Should We Break Up Large Banks?

By Matthew Yglesias on April 26, 2010 at 9:58 am

"Should We Break Up Large Banks?"

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If you think we should, then the Safe Banking Act sponsored by Senators Brown and Kaufman seems to be the most direct path to getting it done. You can sign a petition here in favor of the bill. Conversely, Larry Summers suggests that this would make the system less stable perhaps relying on the findings of Thorsten Beck, Asli Demirguc-Kunt, and Ross Levine which indicate that “crises are less likely in more concentrated banking systems, even after controlling for a wide array of macroeconomic, regulatory, and institutional factors.”

In a specific statement, White House spokesman Matthew Vogel cites the Canadian example “[b]anks in the United States are proportionately smaller than in Canada and in many European countries.” As we’ve seen, this is true and large American banks are much smaller relative to the US economy than large Canadian banks are relative to the Canadian economy. At the same time, in absolute terms the large American banks are much bigger than the large Canadian ones.

At the end of the day, I think it’s a good thing that financial reform legislation is moving forward as a steady clip rather than subjecting us to a health care-esque 18 month process of congress screwing around. But I’m not sure I’ve had enough time to reach a really well-informed conclusion on the subject of bank size. Perhaps I’ll hide behind Paul Krugman who’d “love to see those financial giants broken up, if only for political reasons” but is “not sold on the centrality of too big to fail to the crisis.” I wish Gary Gorton would write something directly on this point.

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