Why Breaking up Big Banks is a Bad Idea

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Why Breaking up Big Banks is a Bad Idea

As soon as the Obama presidency began, one of the major issues that his regime was tasked with was to deal with the recession that faced the American economy. However, what brought headaches to staff at the White House were how they would deal with the financial institutions that seem to be in need of bailouts. In fact, at one point it seems that all the government was doing was rescuing one financial institution after the other.

However, when two of the largest financial institutions in the US faced colossal losses, the government had to rethink its strategy as these banks were too large to simply bail out, and they were also too important to let them sink.

The losses that were being incurred by these banks were so large that it would have been impossible for the government to add capital to them without being the major stakeholders, or letting go a few of the existing stakeholders. It is these scenarios that led to talk of the government nationalizing banks, and even limiting the size of banks.

However, nationalization of banks has not come off well with members of the public, and shareholders of individual banks, with most of them arguing that such a move from the government would mean that control would be placed in the government’s hands. But officials from the White House have said that such a move was not being considered even though the government has already taken over Federal National Mortgage Association (OTC:FNMA) , ederal Home Loan Mortgage Corp (OTC:FMCC) and American International Group, Inc. (NYSE:AIG) Nonetheless, financial analysts are saying that the government’s move to nationalize banks is ill timed, and ill advised. This is because there are over 8,000 banks, and taking over all of them would not only be impractical, but it would also be too expensive. Therefore, the best bet would be to simply make the existing six  or so largest banks even bigger.

One reason why large banks need to increase their asset base, as well as customer reach and numbers is that a big bank has a well distributed risk. Therefore, in case the market hits a recession the probability of the bank failing would be lowered, since it conducts business in virtually all spheres of business, commerce and market.

Additionally, with large banks, it can be possible for the government to monitor them easily. This can be done in many ways, but the most practical would be for the government to have shares in these institutions. Although the government would not be able to make any decisions, it will be possible to monitor the banks.

Lastly, large banks are good for the economy because they can help reduce borrowing costs, and as such, a large percentage of consumers would be able to access loans. This will not only have the effect of spurring economic growth, but disposable income among consumers would increase, and more businesses would flourish due to the ease with which loans are accessible.

Therefore, there is need to increase the size of banks, if we do not want to see the above scenarios replicated, and have to get the tax payer bail out financial institutions again.

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