Do we need mega banks?

I had a post earlier on the problems posed by large banks and I proposed then that we may need to impose a regulatory cap on bank size.

I find that this proposal is being mooted by some very illustrious names and indeed is gaining some momentum- although I doubt that large banks, with their political clout, will allow the proposal to fructify. In an article in ET, Joseph Stiglitz writes:

We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others. And, if we don’t break them up, then we have to severely limit what they do. They can’t be allowed to do what they did in the past — gamble at others’ expenses.

Much the same is echoed by Henry Kaufmann, a much respected figure on Wall Street. In his book reviewed in the latest Economist, Kaufmann is quoted as warning against the dangers of consolidation forced on the financial sector in the wake of the crisis and the problems posed by large banks:

Driving the weak into the arms of the strong may have been expedient, but it swelled the oligopoly of financial conglomerates deemed too big to fail.

Mr Kaufman draws a convincing link between this consolidation and greater market vulnerability. He sees two possible roads to reformation: dismantling the monsters or curbing their riskier activities to the point that they become public utilities, too safe, rather than too big, to fail.

So, if you can't limit the size of banks through regulatory fiat, then you have to limit the nature of their activities. My own view is that the former is,perhaps, the lesser evil. But, a former deputy governor of the Bank of England, John Gieve, quoted in FT, thinks the latter is preferable:

Sir John (Gieve) doubts that policymakers can set an optimum size for financial services, but suggests the industry could be subject to the sort of economic regulation applied to other utilities, such as telecommunications.