SHOULD BIG BANKS BE BROKEN DOWN?

Introduction

      Banks form a significant part of financial sector in the economy by lending money to consumers for spending and businesses for investment. There are also various roles played by banks that include controlling inflation through lending rates and serving as guarantors to investors. However, there are regulations in some countries that require banks to adhere to their primary purposes. This discussion focuses on banking financial institutions especially the big banks. There are varied opinions on fi the big banks should be broken down or not. The concerns raised regards policy issue of the ‘too big to fail’ (TBTF), concerning the bigger banking institutions (Labonte& Marc, pg. 39)

Advanced technology globally has led to an increase in the number of stable financial institutions. Besides, the existence of big banks results from mergers and acquisitions of small banks. Therefore, their achievements and operations are similar to the small banks but only at larger magnitude.  This favors the success of small banks that merge into bigger banks. In addition, the success of big banks also depends on the level of skills and experience from the management, hard work.  All these factors lead to the development of large banks with a significant impact with the banking sector of any Nation (U.S squared intelligence debate, web)

Purpose of study

 The purpose of this research is to find out whether, these big banks should undergo dissolution or not. Decisions on whether to break these mega banks into smaller banking units or not, depends on various aspects. People may view this in various dimension and make different opinions. The study shall majorly consider the global banking structure, especially in the United States. It shall outline the benefits or challenges that may be associated with the large-scale financial institutions especially the big banks.

Literature Review

           Information obtained from the Integrated Square Foundation Debate (web) explores various advantages and disadvantages that big banks have over small banks. According to Robert Rosencrantz,, Delphi Financial Company CEO, in the United State debates, dissolution of big banks May mainly depend on current leadership and technological power in a country The Intelligence Squared Debate specializes on analyzing the information about banking sector in the United States. The United States’ economy is very stable and very advanced in technology. This can be observed from the fact the country experiences very little or no financial deficit in its economy. In addition, the government utilizes taxpayers’ money efficiently. The country has numerous Banking Institutions both large and small that play there specific roles in the modern economy. These include financing the country activities especially the consumer citizens and potential investors (U.S squared intelligence debate, web).

Existences of big banks have a significant impact on the development of this nation. With the existence of many world class companies generating mega profits in dollars, banking system indeed has to be solid-stable to accommodate  such thriving mega companies.. This gives the bigger banks the advantage over smaller banks due to high financing capability, flexible repayment periods and interest that these companies seek. Many investor therefore find better platform to excel and gears-up towards business success in an environment provided by big banks. These companies also spend billions of dollars to sustain enormous growing trend and small banks may not the capacity to finance such huge budgets efficiently as the bigger banks (Johnson & James pg.575-578)

  Large companies depend on these banks obtain financial services regularly throughout the year which also contributes to the growth of the country’s economy through the taxes. Generally, in any nation, large financial institutions would provide unique set of services, global distribution channels and even innovative technologies that will be challenging small bank to provide. A link of support occurs between the large companies and the government. They can frequently offer financial advice, better managerial setup and promote good customer relations among other accrued benefits.  Other capabilities include operational support like risks protection, trade finance support and other management tools (U.S squared intelligence debate, web)

There is different school of thought argues that big banks should be broken to smaller equal sizes. Problems may be caused by the banks that have developed and grown big. (Simon, Johnson &James, web). According to their review, the American regulation policy influencing financial institution occurs because of the big banks. They proposed that the largest U.S. banks should dissolve to smaller units. According to the intelligence squared debate (web), held in 2013, one might consider the following reasons as to why these big banks should be broken down. The United States banks should be in equal sizes and shape to merge in the current economy. If the big banks dominate the states, small banks may not have future progress of advancing to fit in the global banks profile. They shall probably lack that support and determination to progress and succeed in expanding.

 Discussion

The fact is that big banks are very relevant to the current existing economy. In the United States, the big population is mainly made of potential business people and investors. If only small banks existed, the country’s financial circulation would not yield better results. Such Customers certainly enjoy better service from these big banks, like reduction in fees, improved and quick services, and better access to credit among others.

In the current society, smaller banks are merging which increases the number of the big banks. This is an indication of the development of the country economy as small banks merge to meet the capital demands within a country. Nevertheless, it also enhances the ability of the country’s financial institutions to relate with trade fairs and socialization since big banks have higher capabilities.  In addition, considering these countries, it is secure to commit resources with bigger in regards to offering necessary aid to developing countries especially in Africa. This promotes developments across the globe.

           Big banks should not be broken down in order to allow small banks to engage smaller financial obligations like mortgages at both residential and commercial levels. Besides, this may also make the economy less efficient, accessing financing may be expensive due to reduced competition. Therefore before considering dissolution small banks it is important to consider if small banks can efficiently provide the services that bigger banks provides, including financing mega projects that require huge capitals. Other considerations include terms of dissolution as to what will happen to the projects that the bigger banks have already began. Therefore, dissolving big banks should put into consideration the impact it have in other economies that directly depend the financing from these bigger banks. The United States economy is linked to global banks though financing foreign projects and governments. This strengthens their leadership in the world and provides concrete solutions to propel financial systems forward. Another reason why big banks should not be dissolved is they support the small-scale financial institutions at the verge of collapse by offering financial support to regain their stability. All these resourceful business strategies associated with big banks, develops the country’s financial sector to be more stable. This leads to better infrastructure, improved health services, reduction in taxation and inflation, job creation for its citizens among others

          However, bigger banks also have their disadvantages that can lead to consideration of dissolving these big banks. Attention focused on the detailed information from the 2008s financial crisis would support this. If a financial crisis occurs, the effects can be whether it is a high, middle or low-income country especially on bigger banks. An example is the decline in industrial production, especially in countries such as Germany and Japan, towards the end of 2008.

The economic crisis was due to the bursting of a property and stock bubble (Franklin Allen& Elena Catlett, web). There was also evidenced in other countries like Japan in 1990s, which left the real economy at risk. Between August 2007 and September 2008, incentives in the American mortgage industry brought this problem. This made the mortgage industry operations to change over the years. In the past, banks would just lend out funds to only approved borrowers. If the borrowers failed to fulfil the obligation, these banks would shoulder the risks generated.

          A change in the mortgage industry system brought significant solutions. Banks gained good incentives in assessing the borrower’s creditworthiness. However, there was a change in the process and incentives were faulted. Banks did not consider originating and holding mortgages, but instead, the brokers and a good number of banks converted these assets into marketable securities. These brokers and banks finally had to get the payments, according to the approved mortgage number, as their incentives had to sell many mortgages.

         Due to the 2008s financial crisis, adjustments had massive effects world’s financial system. Rules governing banking system have to be revised and appropriate and deliberate steps be considered. The banking system should then be regulated, and their structures be reformed to prevent another crisis from happening. In an attempt to come up with better banking regulation, it is mandatory to consider the benefits and the cost. One of the benefits is that they can impede any crisis that may occur. Therefore, Suggestions pointing at the breaking of these big banks, in all dimensions are better to be first considered.

                However, Small banks should also be allowed to operate alongside big banks. This are simple and safer to operate, therefore why would a country fail to consider their existence? Besides, the management of the big banks may experience trouble due to their large scale of operation. they can break their division in smaller units and learn from the operation of smaller banks. It is certainly clear that the complexity of these big banks causes financial crisis, as are also opaque to regulation even by the government itself. Just like stated before, big banks put small banks at risks of growth, it can be added that even competition abilities may be crippled for small banks when put side by side with larger banks. The government should consider enormous technology benefits and financial capabilities of big banks and associate. This at the end of it is an incredible expense for the government to raise its eyebrows. In conclusion, the United States Government should therefore, ensure equal and fair completion at a business field. This can be possible by achieving a sizable scale in business operations, under the protection of the law.

           The ‘too big to fail’ has been surely the trending issue across the globe. This highlighted in 2008, where majority of the big firms nearly collapsed. These big firms would unexpectedly fail because of their sizes, and the financial systems involved in them. Economic theories could make believe that such institutions would not fail. Well this could just bring moral risks as the creditors and parties involved, would believe that the government shield them from any losses to occur. They certainly developed less concern as far as risks are concerned, since they believed that the government would protect them from such risks.

  CONCLUSION

         Every banking institution whether big or small bank has a specific role it plays in the economy.  Problems developed in financial system may trigger aspects of failure in an economy from inflation, debt accumulation, little or no money for the retirees, financial crisis among others. The big banks are better positioned to deal with this crisis as compared to the smaller banks. Countries should set legal laws to govern banking institutions, their operations and existence. Equality and favorable aspects should reflect at the all the financial institutions. The existence of the big banks should is crucial in the country economy when it is well regulated. From this perspective, smaller banks should also be given incentives that enable them survive the competitions from the bigger banks. This will ensure that every part of the financial society is well served depending on their needs and demands.  Regulators should ensure equitable and balance distribution of big banks and small banks according to the financial dynamics of the population in a given country.

          The scope of their operations of small banks is limited, and more satisfactorily operated. This is the advantage. For example, In the United States, small banks may capitalized well, shaped to offer efficient banking solutions to their esteemed customers. One can notice much difference in terms of operation, if compared to big banks. Even if these banks exist in good number within a country, the government would be able achieve a simple and regulated financial sector where large banks and small banks co-exist. In addition, it also depends with the country. Small banking institutions are easy to access in less developed countries and they may be more favorable than large banks. They increase the accessibilities of financial services by most citizens. In large and economically developed countries like America, the situation is different. The large banks and small banks serve different sectors of the economy and their roles are hard to mix into one category of the bank. The large are involved in funding industrial projects and government operations, while the smaller banks concentrate of domestic financial needs of the population. Definitely, big banks should not be broken down.

Works cited:

Allen, Francklin, and Elena Carletti. “The global financial crisis: causes and consequences.” University of Pennsylvania and European University Institute (2009).

Allen, Franklin, and Elena Carletti. “The Global Financial Crisis.”Documentos de Trabajo (Banco Central de Chile) 575 (2010): 1.

Johnson, Simon, & James Kwak. 13 bankers: The Wall Street takeover and the next financial meltdown. Vintage Books: USA, 2011.

Labonte, Marc. “Systemically Important or” Too Big To Fail” Financial Institutions*.” Journal of Current Issues in Finance, Business and Economics 6.1 (2013): 39.    

The United States Intelligence Squared Debate. Web, accessed from http://www.intelligencesquaredus.org/debates/past-debates/item/906-break-up-the-big-banks    on 19th April 2016.