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Big Banks Are NOT More Efficient
I have repeatedly pointed out that big banks are not more efficient than smaller banks.
For example, I previously noted that an article in Fortune concluded:
The largest banks often don’t show the greatest
efficiency. This now seems unsurprising given the deep problems that
the biggest institutions have faced over the past year.
“They actually experience diseconomies of scale,” [Celent analyst
Bart] Narter wrote of the biggest banks. “There are so many large
autonomous divisions of the bank that the complexity of connecting them
overwhelms the advantage of size.”
Now, James Kwak has done some sleuthing and discovered
that even Fed economists don’t buy the bigger-is-more-efficient
argument. Kwak points out that New York Fed economist Kevin J. Stiroh
found that most of the increase in efficiency during part of the time
in which banks were consolidating was due to the increased use of information technologies:
His main explanation for the productivity growth is not
consolidation, but information technology: “The finding of steady
productivity growth, in particular, is important since it is consistent
with the idea that the massive investment in new technology is working
to improve the performance of the banking industry.” This is not proven
in this paper, but Stiroh went on to write a bunch of other papers on
the link between information technology and productivity. For example, this paper (on the entire economy, not just banking) concludes:“IT-producing and IT-using industries account for
virtually all of the productivity revival that is attributable to the
direct contributions from specific industries, while industries that
are relatively isolated from the IT revolution essentially made no
contribution to the U.S. productivity revival. Thus, the U.S.
productivity revival seems to be fundamentally linked to IT.”
Stiroh also wrote a paper on banks in Switzerland, concluding:
“We find evidence of economies of scale for small and
mid-size banks, but little evidence that significant scale economies
remain for the very largest banks. Finally, evidence on scope economies
is weak for the largest banks that are involved in a wide variety of
activities. These results suggest few obvious benefits from the trend
toward larger universal banks.”
The kicker is that Stiroh is the main source cited by those claiming that bigger banks produce greater efficiencies.
The bottom line is that there is absolutely no reason not to break up the too big to fails.
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It's all about moving markets and getting laws passed to support your schemes and then having NO ONE who can say you are doing anything wrong because you and your cartel members are above the law--more is better, then when the time is right, blow up and keep reminding everyone how important the institution is and certainly it is "toobigtofail" and that it would be wise for the US to hand over the dough and strap the taxpayers til eternity.
This is an extraordinarily complex topic. Considering the size of the country, the fact that many corporations operate in all 50 states and the speed with which people want to move from state to state, there is an argument for large banks. In addition, globalization makes the case for Citibank and other depository institutions that are located in numerous business and travel centers around the world. The issue becomes how the regulators can track what the banks are doing. The trick comes in understanding opaque balance sheets and the use of accounting techniques to hide what's really going on. There was a brief moment where accounting standards were getting a good bit of press....does anyone remember that we lost Arthur Andersen? That should have signaled that other banks, brokerages and insurance companies were not far behind. Of course when push came to shove, accounting standards were rolled-back. (If i'm not mistaken that was right around the time of the "stress tests.") Modern financial management is still not understood by investors and regulators. Size is not as important as understanding the risk of thousands of p/l statements. Bigger may not be better, but forcefully breaking up institutions may also be foolish. The feds are on to something now and this site should be a place where suggestions can be floated regarding how to close down a troubled bank without imploding the system.
Supersized banks do only one thing best: lobby.
SIZE matters.
There are few if any huge organizations that are truly 'efficient'.
Eventually, participants in organizations learn to expand their departments whenever and wherever they can to occupy more turf and numbers of staff members, regardless of the industry or institution.
For any organization there is a right size, and invariably it is always exceeded to the nth power until it topples over on itself, crushing all below. The Federal government is a prime example of an entity that has far exceeded its usefulness, and ability to carry out its original function of providing services to the people.
GM and practically every large corporation can layoff 10,000 workers and not miss a beat, generally becoming far more efficient in the process. You have to ask whe was it necessary to hire those 10,000 people in the first place. Behind those decisions you will find a department head seeking more turf and personnel simply to make the department look more important, have a bigger budget and a bunch of paper to justify it.
The most inefficient organization is the United States. This organization needs to be dissolved, broken up into a couple dozen pieces with regional Presidents,separate constitutions, and governing bodies more directly accountable to the people, with far greater transparency.
The United States has become a gigantic failed experiment and looking back, Lincoln and Jackson might have been better off had they lost the battle to keep the disparate member states of the union intact.
And the more the population grows, so much greater will the chaos be.
All we have to do is get back to States rights. Run the country like the Founding Fathers envisioned. Much less power for the Feds
Couldn't agree more on every point. Energy is required to maintain cohesive organization within any large system, and the larger the system, the more that such energy gets siphoned away from productive work towards maintaining internal structures.
What's more, in very large systems (especially hierarchies), most of the energy is required by the center of the system as the central coordinator, which means that there is typically layers within such organizations which are simultaneously too far from the boundaries in order to receive incoming energy from the outside while at the same time to far from the center to receive reprocessed energy, and ultimately becomes non-productive (the layers of bureaucracy problem).
The problem is that collectively, these layers also provide barriers to energy transmission and ultimately will starve the center. Whether this is GM, CITI or AIG, the results are usually uncoordinated and frequently even counterproductive units working within a matrix of essentially unproductive detritus.
And yes, the US falls into this category as well.
Couldn't agree more on every point. Energy is required to maintain cohesive organization within any large system, and the larger the system, the more that such energy gets siphoned away from productive work towards maintaining internal structures.
What's more, in very large systems (especially hierarchies), most of the energy is required by the center of the system as the central coordinator, which means that there is typically layers within such organizations which are simultaneously too far from the boundaries in order to receive incoming energy from the outside while at the same time to far from the center to receive reprocessed energy, and ultimately becomes non-productive (the layers of bureaucracy problem).
The problem is that collectively, these layers also provide barriers to energy transmission and ultimately will starve the center. Whether this is GM, CITI or AIG, the results are usually uncoordinated and frequently even counterproductive units working within a matrix of essentially unproductive detritus.
And yes, the US falls into this category as well.
Inefficiency is one thing, but it has reached the point of complete non transparency, and a strange collusion of behind the scene political forces (military industrial complex, the big banks) that continue to corrupt the country (wars of non purpose that threaten the country, obvious wealth extraction on a record scale through bailouts and public debt), and somehow we're living in a sensationalistic-media state that isn't so much about control as it is about senseless disinformation akin to a Kabuki theatre we're forced to watch. The real agenda/actors remain behind the scenes.
Inefficiency is one thing, but it has reached the point of complete non transparency, and a strange collusion of behind the scene political forces (military industrial complex, the big banks) that continue to corrupt the country (wars of non purpose that threaten the country, obvious wealth extraction on a record scale through bailouts and public debt), and somehow we're living in a subtle-media state that isn't so much about control as it is about senseless disinformation akin to a Kabuki theatre we're forced to watch. The real agenda/actors remain behind the scenes.
will making them smaller be a good idea?
Gems from Jamie Dimon’s interview with Charlie Rose – link on Bloomberg.com
“It doesn’t really matter what the deficit is"
“Who caused the ‘cardiac arrest’ we had to our financial system?” gesturing toward the crowd “You did!”
“I always give the benefit of the doubt to the person in the ring” (on criticism of the bailout)
“We think everyone should be allowed to fail. We think failure is a good thing.”
“Remember most of the people in most of these failed institutions lost a lot of their ‘pride’ and ‘reputation’ – its not as if they took a bet and if you win you make money, and if you lose you’re ok… ‘cause that’s not what happened.”
“We need, all of us need Citibank, BOA, and all these other companies to be healthy, vibrant and growing.”
“(The FED money printing) is a drop in the bucket. I have faith and trust that they will be able to deal with it intelligently.”
“I think when the Government asks you to do something, you do everything you can to accommodate them.”
Marx did the best analysis of how size affects capitalist production. It applies to banks, it applies to other companies. None of these modern economists get to the root of the economy. And they (we) ignore the lucid explanations given by Marx in his three Volumes of "The Capital" at our peril.
As my kids would have said a few years ago, "Well, duh." Economies-of-scale becoming dis-economies-of-scale at a certain size has been observed in everything from data centers to termite colonies. Most big (e.g. ginormous) organizations are really 12 midgets in a giant suit in everything except their marketing collaterals.
Yes, except they're heterogenus midgets, all facing different directions, speaking different languages, with dissimilar incentives, goals, and ways of moving.
Marx did the best analysis of how size affects capitalist production. It applies to banks, it applies to other companies. None of these modern economists get to the root of the economy. And they (we) ignore the lucid explanations given by Marx in his three Volumes of "The Capital" at our peril.
I couldn't agree more. I am actually shareholder in a small private local bank. The bank can do anything the big guys can do, and with better customer service.
Really? A few years back, I went golfing at Myrtle Beach. Spent a bit more than I expected, so I went to some banks to exchange my Canadian dollars for US currency.
Now, let's remember that Myrtle Beach does a lot of advertising in Canada to attract us snowbound Canucks. But when I went to these banks (at least five, if memory serves), the response I got was "We don't do that here". I was dumbfounded. There's not a branch of Canada's big five banks that doesn't do currency conversion, and that doesn't have US dollars, British pounds, and Euros on hand in some amount. And let's remember, I wasn't asking for some exotic currency; I wanted them to take my Canadian $ and give me greenbacks.
Having worked for one of the big banks which has since gone the way of the dodo I can tell you that they are not more efficient. Not only do they make the customer jump through several hoops just to get a bogus bank fee credited back to their account, one department often doesn't have a clue what the other is doing. WAMU in the early 00s was making multiple huge mergers and acquisitions of other mortgage companies in an attempt to become the biggest lender in the nation. I fielded many calls from irate customers whose loans had been purchased by WAMU complaining that WAMU was accusing them of being delinquent but they had paid their mortgage on time for years and never had a problem until WAMU got their hands on their mortgage. WAMU's loan department did not have enough staff or an adequately trained one to deal with all the new loans they were buying.
We all know how that turned out.
Small is beautiful.