The "Big Banks = dangerous" fallacy

Discussion in 'Economics' started by Cutten, Mar 20, 2009.

  1. Question - if 100 banks each owned a portfolio equal to 1% of Citibank's portfolio, how would those 100 banks as a group be any different to Citibank? They would all become insolvent under the same conditions, they would make or lose similar sums of money based on how the loans and assets perform.

    If all 100 banks are all massively leveraged long overvalued bubble real estate, and it collapses, they are going broke just as surely as Citibank would go broke. Actually it would be worse because they would have higher overheads, less economies of scale, high funding requirements, less perceived safety in the market and so on.

    So, how is it a problem for a bank to be big? The 100 banks as a group would be just as much "too big to fail" as Citibank. Only difference would be that they would fail over a few weeks/months, instead of in one day.

    The entire US banking system is collectively "too big to fail". So what's the solution - ban banking? Lol.
  2. Your question is flawed. For starters, you've made everyone bankrupt by implicitly assuming C's portfolio size is appropriate.

    A better version of the question is...

    "Would 100 small banks acting independently create a portfolio as large and unsustainable as C's?"