Who needs the “too big” banks?

In the ACT’s response (June 2009) to the Turner Review on the Global Financial Crisis, we touched on the question of who needs the super-large banks. Perhaps it is large companies. But we had doubts.

So, we consulted the ACT Policy and Technical Committee and others, including some members at some of the large companies which might be most affected by the availability or otherwise of the largest financial institutions as well as more widely.

Like many others, Lord Turner noted significant issues around the risks that can be created: banks “too big” (or too complex/interconnected/etc.) to fail or perhaps too big to rescue. Others have suggested that such too big institutions may be too big to be managed efficiently, making the institutions a drag on society as a whole. Probably, that’s right.

We agree that all this should be approached after a proper risk assessment, looking at the full effects on society.

But from the corporate customer point of view, we can say at least that generally companies do not need super-large banks.

There can be minor conveniences in dealing with a very large bank that can provide a good range of service across the globe, but it is not usually a company’s key selection criterion. Even for “global” cash management, companies tend to restrict a single bank to only a part/region/hemisphere of its group business and seek to ensure they have a second partner bank which could take over seamlessly from the main incumbents in case of need.

Treasurers welcome a diversity of providers in order to access a diversity of products, ideas and expertise. Competition is important too, so market dominance or cartel behaviour is not helpful, and therefore there should be some limits. General competition law deals with that.

For some super-large companies it will occasionally be convenient to be able to deal with one or two super-large banks with correspondingly large balance sheets and ability to take or underwrite significant risks, e.g. a large acquisition financing commitment, but even then the risk is normally rapidly distributed out. Companies could easily learn to transact with a group of banks rather than rely on a sole underwriter and some already do this as a matter of policy.

Of course, super-large banks provide an easy route for company Chairmen and Chief Executives who like to do the grand things in banking relationships.

But, overall, the question remains open – who really needs the "too big" banks?
The ACT’s response (June 2009) to the Turner Report is available here.

By John Grout