Sep 21, 2010

Small vs BIG

Recently, a study by the Netherlands Bureau for Economic Policy Analysis (CPB) sketched a number of scenarios about the future for finance. It seems that small banks are the safest bet to prevent a new financial crisis.

The Dutch banking conglomerates and the Dutch Central Bank (DNB), however, oppose the idea of smaller banks. They have a preference for universal and internationally operating banks. Understandably, the conglomerates don’t like to wind down their operations. More interesting, is the central bank’s preference for big, as one would assume that its first and foremost priority is a safe financial system.

The Dutch Central Bank’s preference raises a number of interesting questions about geopolitics, power and the role of finance in society. Firstly, why does the bank prefer big over small? My assumption is that the bank’s employees (and president) have rather mundane motives for this position. Supervising universal banks gives them a say in global financial regulation, such as the BIS. Conversely, supervising small banks will sideline them on global level and lower their status vis-à-vis their peers. It’s probably difficult to come to terms with this change and with their (much more boring) job of only regulating nationally operating (retail) banks.

Secondly, however, we should not refrain from another pertinent question: what will be the influence of smaller banks on the geopolitical position of the Netherlands? The international position of states is importantly tight to the size and scope of their financial system. Only small banks may diminish the influence of the Netherlands internationally. Hence, it’s really about an internationally competitive position from a political perspective and not so much from an economic perspective. Geopolitics, so to say. But central bankers, and politicians alike, hardly make this explicit. At least, not publicly.

In order to further discussions about the future of finance and its role in society, we have to include questions about power, geopolitics and mundane motives more openly. This will not directly solve regulators’ (including politicians) difficult position of having to balance an internationally competitive position with sentiments of the (nationally embedded) public. But it will help to better weigh different scenarios about the future for finance (in the Netherlands, elsewhere and also globally). Only then can we really start to think about the role of finance in society.