Second of three parts

As the politicians and regulators fret about how to handle big banks, it is worth asking whether we really even need them — big banks, that is.

We do.

We don't.

We might.

The question, like so many raised in the wake of the financial crisis, is fraught with disagreements over policy and philosophy, over the measurable benefits to the economy and the ultimate costs to society.

So let's begin with the easy part, about which there is relatively little dissent.

From a retail perspective, big banks are often useful to consumers and frequently successful in achieving economies of scale when it comes to gathering deposits. But they are not necessary.

If the country's largest banks disappeared tomorrow, consumers might miss having branch and ATM networks with the ubiquity of Starbucks and the efficiency of McDonald's. But they would still have 8,000 other banks where they could open checking accounts and park their savings, in many cases lowering their fees and getting better interest by doing so.

The value of big firms is a more interesting question where commercial banking is concerned.

There are only so many balance sheets large enough to support the financing needs of giant corporations. But as a defense for big banks, that is an argument that leaves former International Monetary Fund chief economist Simon Johnson unmoved.

Johnson, a professor at the Massachusetts Institute of Technology's Sloan School of Management and an avid proponent of breaking apart big banks, notes that much of the lending and capital issuance arranged for big clients already is divvied up. If each firm had less balance-sheet capacity to offer, he said, the syndicate groups could simply expand without sacrificing deal size. Whatever the cost of the resulting inefficiencies — extra paperwork, additional desk clerks — "there's no way it outweighs the cost we're seeing" to support big banks in their current form, Johnson said.

Not everyone agrees. The benefits of consolidation lowered the underwriting costs of accessing the public equity market by more than 20% between 1980 and 1999, according to the research of Columbia University finance professor Charles Calomiris. Those savings, Calomiris argued in a recent opinion piece in The Wall Street Journal, "expanded use of the market particularly by young, growing firms."

Taking into account the multiplier effect of that access, admittedly a calculation that may involve more art than science, the burden of shouldering systemically risky banks may seem less stark.

It is a burden nonetheless. But it may be one that is unavoidable in certain areas of banking such as global transaction services and working capital loans, often requested in a variety of currencies to match the far-flung operations of multinational customers.

"For somebody like IBM or for somebody like Exxon, they need somebody that can help them around the world," said former Citigroup Inc. Chairman John S. Reed, who still considers Citi's global reach a cornerstone of the company. "At Citi in the old days, our international business had 1,500 major companies that we called our 'world corporate customers,' and we basically provided them local-currency working capital around the world. No consortium of small U.S. banks could have done that," he said.

Since Reed's retirement in 2000, the biggest banks have only gotten bigger. About 75% of the assets held by public banks and thrifts in the United States reside on the balance sheets of the 10 largest firms, according to data from SNL Financial. A decade ago, the asset concentration among the 10 largest firms at the time was just 54%.

The increase in concentration, driven largely by mergers among already sizable institutions, have helped big banks to leverage the expense of intricate payment systems and other vital components of the financial system that would be difficult to imagine existing in the absence of giant firms.

"Clearly you've got to have a lot of size and substance to play a role as a lead banker," said Fred Joseph, the former chief executive of Drexel Burnham Lambert, who since 2001 has been arranging investment banking deals for the middle-market customers of Morgan Joseph & Co.

But whereas Calomiris sees the industry's consolidation as a boon for young companies, Joseph argues that "the lending decision-making process is being concentrated to the serious long-term detriment" of firms outside the circle of elite corporate clients chased by the biggest banks. And to Joseph, who sees most of the potential for economic growth in this country resting in small to midsize companies, that has serious consequences for the broader economy.

In deciding on an approach to big banks, the U.S. simply will have to decide which consequences it is most willing to live with.

Coming tomorrow: A look at whether the risks posed by big banks have more to do with their size, or the way they are managed.

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