Are Banks Too Large? Maybe, Maybe Not


By Luc Laeven, Lev Ratnovski, and Hui Tong

Large banks were at the center of the recent financial crisis. The public dismay at costly but necessary bailouts of “too-big-to-fail” banks has triggered an active debate on the optimal size and range of activities of banks.

But this debate remains inconclusive, in part because the economics of an “optimal” bank size is far from clear. Our recent study tries to fill this gap by summarizing what we know about large banks using data for a large cross-section of banking firms in 52 countries.

We find that while large banks are riskier, and create most of the systemic risk in the financial system, it is difficult to determine an “optimal” bank size. In this setting, we find that the best policy option may not be outright restrictions on bank size, but capital—requiring  large banks to hold more capital—and better bank resolution and governance.

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Fair and Substantial—Taxing the Financial Sector


By Carlo Cottarelli

(Version in 日本語  )

We knew we were in for a tough time when the leaders of the Group of Twenty (G-20) asked the IMF to give them our views, at their summit coming up in June 2010, on  “… the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system.”

Everyone has strong feelings these days on the taxation of the financial sector. Taxpayers who financed the rescue of the financial sector during the recent crisis want their money back—or at least not to get caught again. Some want to see more of the money coursing through the financial system turned to public use.

The industry worries about new taxes coming on top of the swathe of regulatory reforms that likely lies ahead for them. And some governments in countries whose financial sector weathered the storm pretty well wonder why they should now ask it for cash. Responding to the request from the G-20 leaders puts us in the middle of all these concerns.

Last week the IMF gave an interim report to the G-20 finance ministers focused on the specific question we were asked: what are the options in raising money from the financial sector to pay for the costs of government intervention from which it benefits. That report is confidential, but—you may have noticed—has still managed to attract a lot of attention.  So let me set out how our thinking on this stands.

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