FT.com / Comment / Opinion - Ten principles for a Black Swan-proof world: "1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest."
What if there are economies of scale in banking? Suppose there are economic reasons that larger banks (that are too big to fail) are more efficient than smaller banks at certain activities. Should we then allow them to exist and just bail them out with taxpayer money when they fail? An alternative reason that banks might be so big is that there is a strong correlation between the size of a company and the pay its management gets. There is little correlation between profitability and CEO pay. Thus, a smart CEO is better off maximizing his (it is usually a he) pay by merging with and acquiring new firms than by actually doing profit maximizing deals. Regardless of the reason banks evolve to become too big to fail, there should be an increasing fee (like a progressive taxation) upon banks as they become too big. If there are really strong economic efficiency reasons for the banks to grow anyway, then they can still do so and they will at least generate some of the tax money to compensate for the risk that taxpayers must bail them out.
No comments:
Post a Comment