Value of Large Financial Institutions
When deliberating over new regulations on large financial institutions, it is important to balance the benefits of regulation against the costs. Large banks provide valuable services to multinational companies that enable them to grow into markets, create jobs, and innovate. To demonstrate this value, the Business Roundtable surveyed their nonbank members and found that virtually all members rely on large banks for a wide-variety of financial services and products.
Wharton Finance: Who Said Large Banks Don’t Experience Scale Economies? Evidence From A Risk-Return-Driven Cost Function
In her literature review of economies of scale in banking, Loretta Mester, the President of the Federal Reserve Bank Of Cleveland, concluded, "The literature on scale economies in banking, including my own studies, suggests that imposing a strict size limit would have unintended consequences and work against market forces…" Mester concluded that better solution to legislative limits on bank size included a credible resolution mechanism and other regulations to improve bank safety.
Last April, Mester and Rutgers' Joseph Hughes updated their paper on scale economies and explored the consequences of a break up. Their analysis concluded that since scale economies increase with size, the break-up of the largest financial instructions would have significant consequences in the global market.
As the debate over appropriate financial regulation continues, proposals to break up global financial institutions endure. Notably absent in these proposals, however, is an acknowledgment of the consequences a break up of large financial institutions would have on the U.S. economy.
The Clearing House has analyzed the size and concentration of the U.S. banking system in relation to the needs of the U.S. economy and the banking systems of other developed countries. Scaled to Serve: The Role of Commercial Banks in the U.S. Economy presents compelling data that demonstrates the U.S. banking system is appropriately scaled to support the U.S. economy, especially firms with global reach