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In May 2014 Luc Laeven, Lev Ratnovski, and Hui Tong of the IMF reviewed the issue of Bank Size and Systemic Risk. Here is part of their executive summary:
Large banks tend to have lower capital, less-stable funding, more market-based activities, and be more organizationally complex than small banks. This suggests that large banks may have a distinct, possibly more fragile, business model.
Large banks are riskier, and create more systemic risk, when they have lower capital and less-stable funding. Large banks create more systemic risk (but are not individually riskier) when they engage more in market-based activities or are more organizationally complex.
Failures of large banks tend to be more disruptive to the financial system than failures of small banks. The failures of large banks generate liquidity stress in the banking system, their activities that rely on economies of scale and scope cannot easily be replaced by small banks, and the marginal cost of taxpayer support may increase in the volume required.
Traditional bank regulation, which focuses on individual bank risk, may be insufficient for large banks. Additional regulation, based on systemic risk considerations, is needed to deal with the externalities of distress of large banks. This may include capital surcharges on large banks and measures to reduce their involvement in market-based activities and their organizational complexity.
A one sentence summary: Very large banks introduce systemic risk to the financial system.
They then “chicken out” on the question of benefit for large size and simply chose to ignore the question with the following statement:
Banks may operate at a size that is too large from a social welfare perspective due to “too-big-to-fail” subsidies and corporate governance shortcomings. However, the potential for economies of scale in large banks cannot be dismissed. As a result, “optimal” bank size is uncertain.
Study on optimal bank size <——-
Laeven et al plotted the characteristics of more that 150 large banks, shown in the following six graphs:
See discussion at end of “Investment banking: linkages to the real economy and the financial system” by Kushal Balluck of the Bank’s Banking and Insurance Analysis Division.