On breaking up the large banks

It appears some people would like to break up the large banks.  It might be wise to interpret this to mean increasing competition.

This would be a good thing for consumers.  For there to be perfect competition no player in a market should be large enough to influence prices either by withholding a product or service or by refusing to purchase. So to make the case for breaking up the large banks one should evaluate their effect on pricing in each market in which they operate.

If the case can be made then the thing is to increase competition which means looking at licensing.  Licensing programs are one of the ways in which governments restrict competition.  They way to deal with too large banks would be to allow more players onto the field.

Competition also requires that all players in a market should know everything.   Therefore we should require banks to make more disclosures about their own financial conditions.  This would be difficult because the greatest fear of every bank executive is a run by depositors demanding the withdrawal of their money.  I predict there are very few bank managers who would hesitate to lie to hold off a run on their banks.

In dealing with banks we also need to remember their involvement in money creation.  This gives them a great deal of power because our economy depends upon adequate money and because bankers get to determine whether or not a project goes ahead and who gets to do it.

Breaking up the large banks, or rather increasing competition in their markets, would be good for consumers although it may not be so good for at least some people in the industry. I wonder which group are most effective at lobbying.


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