At the Buttonwood Conference sponsored in New York by the Economist, Governor of the Bank of England Mervyn King just gave an elegant and candid speech in which he noted that policymakers might even have to look at splitting up the very large banks–an approach many observers, including me, believe is essential for managing the underlying stability of the global financial system.
Only hours beforehand, however, incoming CEO of the giant Barclays, Mr. Bob Diamond, was speaking at the CBI Conference in London. I cannot find a copy of Mr. Diamond’s speech on either the CBI or Barclays web sites. According to multiple reports, however, Mr. Diamond stridently attacked the possibility that banks might be contained by size. He is reported to have asserted that it “was time for fact-based analysis” of the banks’ role in the economy” and that
‘There is no empirical evidence that big is bad – in fact, quite the opposite. Banks dependent on a single market or product can be a greater risk, as we saw with Northern Rock. . . . By contrast, the global universal banking model, which integrates retail, commercial and investment banking, is well diversified by business and geography, well diversified by clients and products. And it should carry less risk, by virtue of that diversification, if it’s well run.’
Mr. Diamond, like his counterparts at JP Morgan Chase, Mr. Dimon, and at Deutsche Bank, Mr. Ackermann, is a well known defender of the ultra large banks. And with them he asserts the supposed benefits for stability, and international trade and competitiveness, of these banks. Yet it takes some chutzpah to demand a “fact-based analysis” when facts have yet to be produced to support his proposition. Not only is the available evidence actually to the contrary (see the discussion in this working paper); the assertion that clients need such banks is implausible. Bankers love to believe that they will capture 100% share of their customers’ wallets, and corporate bankers are no different from their retail counterparts. But the last time I checked in on corporate banking, both domestic and global, no large corporation in its right mind would have entrusted all its business to one bank, and no large bank in its right mind would have tried to undertake the exclusive provision of very large loans or underwriting to one client. Loan and investment syndication is a key (and efficient) feature of both capacity and risk management.
So until the evidence to the contrary appears, the fact-based analysis provided by Mr. Diamond is really only so much bloviating.
Let me conclude with a reality check for readers who might think that highly confident CEOs know something they don’t. Here is a statement made by the CEO of Wachovia on May 18, 2006, just days after he had bought Golden West, the acquisition that destroyed the company:
[T]here is great value in the universal bank model for both customers and shareholders. . . . [I]t is not an easy model to execute, but if you can knit disparate businesses together in a way that brings great value to customers, you will undoubtedly also deliver exceptional value to shareholders. . . . Done right, size enhances competitive power. . . . [A] universal bank . . . has much more to offer customers.
