Your article on "
As you are probably aware, I think the ultra large universal banks are becoming dangerous and will ultimately destroy our financial stability (if they have not already). So I was surprised at the accompanying graphic — until I realized that you had averaged the efficiency ratio for all banks above $10 billion.
If one does another cut at the much more realistic cut-off level of $1,000 billion (at which point I think all the diseconomies of scale start kicking in the TBTF becomes a political necessity), you will find that efficiency ratios escalate. The only way those behemoths make money is through (a) the massive public subsidy they receive; and (b) dangerously high leverage.
So the takeaway from your article for me is this:
1. Community banks, essential to our renewal, are being smothered by regulation that is designed to save us from the dangers of extremely large banks. It is no wonder that their efficiency ratios are deteriorating;
2. Mid-sized banks ($10 billion - $1 trillion or so) are relatively efficient and necessary for large scale financing needs, but they should not be lumped together with the global top ten; and
3. We are promoting policies that protect and encourage inefficient, dangerous universal banks that are the true threat to our financial stability. Cam Fine's concern about the ultra large is right on point.
How did we get everything so badly wrong? Because of the undue regulatory influence and the escalating political power of these very big institutions.
Lawrence Baxter
Professor
Duke University School of Law
