Explaining the Credit Crisis

Eamonn Butler (yes, one of my bosses):

These days, banks are huge. If a big name failed, it would be an enormous catastrophe. The Bank of England rightly doesn\’t want to risk that. So why exactly are banks so huge these days? Here we come to the ultimate cause of this crisis – governments. The authorities\’ very anxiety to keep customers safe has made them introduce more and more detailed and onerous regulation. The only banks that can afford to deal with this bureaucracy are the big ones. Regulation has made the banks fat – and their customers complacent. It would be much healthier if the banks were competitive and customers eyed them up more carefully before trusting them with their savings.

Regulation creates barriers to entry: thus there are too few entrants and the incumbents grow to a size where they are indeed deemed too big to fail.

11 thoughts on “Explaining the Credit Crisis”

  1. I have always found it strange that the left hate “big business” yet it is their own insistence on more and more regulations that create them.

  2. Yes, I’m sure the prevalence of big banks has nothing to do with the economies of scale related to computerisation (from 1960-today), national branding and centralised customer service functions. That would just be crazy talk.

    After all, the supermarket industry is barely regulated at all, and as a result it’s made up of hundreds of independent grocers competing for custom, rather than dominated by a “big four” effect.

    Oh, wait…

  3. This is really the story of our times…

    We, as a population, are unable to do many things without coming up against forms of regulation that need to be complied with.

    Be it complicated tax/financial corporate stuff or building regulations that mean I can no longer wire my own house without a government certificate.

    The really bad thing is that there seems to be no end to it… this is, I think, because it is not a natural ‘system’ in that there seems to be little to counteract this compliance-creep. It is all one way traffic, from government down to us with noway for us to ignore it.

  4. john b,

    Wouldn’t you say building regulations have had a large impact of the structure of the supermarket business?

  5. “Wouldn’t you say building regulations have had a large impact of the structure of the supermarket business?”

    N0, I wouldn’t. Or at least, I’d say that the main regulations that do affect the supermarket industry, on restricting new out-of-town sites and on overall market share limits, would both lead to an even more consolidated industry if repealed.

    Banks and supermarkets, like most businesses serving the mass market, work best [work here =”provide a tolerable product for the cheapest prices”] when they’re big.

    Meanwhile, investment banks don’t serve the mass market, which is why they range in size from two-man-bands (which still manage to meet the regulatory requirements) through to Goldman Sachs, depending on the size of company that suits the particular niche they’re in.

  6. john B,

    “Yes, I’m sure the prevalence of big banks has nothing to do with the economies of scale related to computerisation”

    Which is why, for years, the cheapest mortgage used to come from people like the Scarborough or the Hinkley building societies, not Nationwide or Halifax.

  7. “It would be much healthier if the banks were competitive and customers eyed them up more carefully before trusting them with their savings.”

    That seems more like an argument for getting rid of deposit insurance than regulations in general, because as long as the government guarantees your money why should you bother taking care about the stability of the bank before depositing money?

  8. Here in Russia we have over 3,000 banks, with only a few national ones. The Bank of Moscow and Sberbank are pretty big, but there is a mind-boggling number of independents. One we have here is called the Bank of Dolinsk. Dolinsk is a town of a few thousand people, mostly living in tumbling-down Soviet-era apartment blocks overshadowed by a massive, derelict paper factory.

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