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Banking

Economist debate: Does more competition make banking more dangerous?

Banking – This house believes that more competition make banking more dangerous.

Banking markets across the world have become increasingly concentrated over the past few decades. In the United States, the market share of the five biggest banks has increased to 34%, from less than 8% in 1994. Banks that before the crisis were thought to be too big to be allowed to fail have grown even bigger and failing institutions have been pushed into one another’s arms.

In large parts of the world, the idea of having a few very big banks is generally thought to be a good thing. Economists and regulators thought that cozy banking oligopolies were so profitable that banks would be stupid to take any risks that might upset the status quo. What is more, having just a few big banks meant that regulators could watch them closely.

Yet now official wisdom seems to be turning 180 degrees. The European Commission’s competition regulators are busily trying to force banks to divest. Britain wants its banks to erect firewalls between their parts. Although not exactly splitting them up, it wants dotted lines drawn to allow for easy separation should that be required. And in the US, officials are pushing hard to tilt the competitive playing field in a way that will advantage smaller banks. Should our big banks be broken up, or will having more banks scrapping about in the market just make it a more dangerous place for all?

The debate is now concluded.

Winner announcement

If policy decisions relating to the regulation of finance were easy, financial crises would be things we read about in the history books rather than in the newspapers. What is striking about this industry, however, is that fairly fundamental questions relating to it are still unresolved. Ask three economists how much capital banks should hold, for instance, and you will likely get six answers. In fact on many questions if you get a single answer it is likely to be “we don’t know.”

Attempting to isolate a single factor, as this debate has done, is always bound to be subject to limitations. Finance and banking are complex systems in which any change to one part impacts on all of the others.

In such a world of uncertainty, I commend both of our debaters for clearly laying out spirited and cogent arguments that clarify both the points of dispute and agreement over the appropriate level of competition in banking.

Participants from the floor made up their minds early on that competition does not make banking more dangerous and Frank Allen was unable to change their views. Thorsten Beck may have found an audience that was inherently inclined to his viewpoint (would one expect much else from Economist readers?) yet that does not diminish the force of his argument.

Read the remarks and comments on the debate through The Economist website.

Background reading

A special report on international banking: Survival of the fattest

Free exchange: Does size matter?

Finance: Taming the banks

The interim report of the Vickers commission: Bigger buffers, smaller banks

Economics focus: Deliver us from competition

Visit Ideas arena: International banking

 

Defending the motion: Franklin Allen
Nippon Life Professor of Finance and Economics, Wharton School, University of Pennsylvania.

“While there are many historical examples of stable financial systems with limited competition such as Canada, there seem to be relatively few examples of highly competitive stable banking systems.”

See his remarks on the Economist website.

Against the motion: Thorsten Beck
Professor of Economics and Chairman of the European Banking Center.

“Competition in banking is not dangerous per se; it is the regulatory framework in which banks operate and which sets their risk-taking incentives that drives stability or fragility of banking.”

See his remarks on the Economist website.

Moderator: Jonathan Rosenthal
British Business Correspondent, The Economist.

See his remarks on the Economist website.

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