Some empirical evidence for Bob Diamond
“There is no empirical evidence that big is bad or big is risky. The reason that Barclays is a bigger bank than it was 10 years ago is because our clients are. The City of London should have a financial centre, and the City of London should have both UK corporates and international corporates that can manage their risks, transfer capital and invest capital on a global basis.”
First that “empirical evidence” point. The Bank of England did not share Mr Diamond’s relaxed attitude to the moral hazard of too-big-to-fail banking in its most recent Financial Stability Report and provided some evidence to explain its concern:
“Policy action is needed to reduce the structural problems caused by banks that are too important to fail (TITF). Larger UK banks expanded much more rapidly than smaller institutions in the run-up to the crisis and have received disproportionate taxpayer support during this crisis. That reflected a misalignment of risks on TITF banks’ balance sheets, due to implicit guarantees on their liabilities.”
As for the (somewhat garbled) Diamond argument that big companies need big banks, now that is a theory for which there is no empirical evidence. When a large corporation raises debt or equity, they are often, even now, serviced by a group of investment banks, rather than just one monster firm. The corporations seem perfectly happy with this arrangement. As far as I know they are not demanding bigger banks to service their needs.
As Simon Johnson of MIT and the Baseline Scenario (essentially reading for anyone interested in banking reform) has pointed out “there is simply no evidence… that society gains from banks having a balance sheet larger than $100bn”.
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