07 Dec 09 Sustainability in Financial Services – Does size matter?
US Treasury Secretary Timothy Geithner has proposed that the Governments should interfere to ensure that financial institutions should never be allowed to grow so big that their failure can attract serious repercussions for the economy at large.
There have been mixed reactions to this proposal. Part of the business community believes that this is a firm step ahead from the Obama administraton, re-affirming commitment to the causes espoused during the presidential campaign and a serious attempt to thwart greed in Corporate America. However, there has certainly been uproar from the business community, especially banks, who have been at the centre of the financial storm.
Among the strongest voices raised against the proposal has been Jamie Dimon’s (The chairman and chief executive of JP Morgan Chase) and among the strongest voices supporting the proposal is Alan Greenspan’s which says “If they are too big to fail they are too big”!
With JPMC’s ~220,000 employees and US $2 trillion in assets, Jamie Dimon has something to worry about. In a strongly worded open-editorial in the Washington Post, Jamie Dimon argues that no company can be too big to fail and as a corollary possibly, every firm should be allowed to fail, if circumstances deem it so.
He argues that the proposal to contain growth will not only ultimately make US banks non – competitive but would also leave the customer ill- served. Size brings with it many advantages to a customer and artificially containing size will prove counter productive. Needless to say, Dimon’s editorial has led to another round of debate.
The developments in the US led me to think about issues closer home. When the UTI fiasco happened, the Government ultimately bailed it out of the mess. What would happen, if SBI or (horrors!) LIC should fail? You bet the government would step in – it simply has no other choice.
So when we talk of all things sustainable, should Corporate Growth figure in it as well? The question is a good one and I believe that intentions from both sides are good as well.
I do think it would be impossible to insulate the economy if the biggest institutions that have more than 10% of the country’s deposits fail one fine day. JPMC (and the other big four of earlier eras) have given similar free market arguments, “investor and economy benefits” arguments. It may also be worthwhile to analyze some of the claims by Jamie Dimon and other big banks – whether incremental size really delivers measurable benefits to customers? Will there always be benefits in increasing size to infinity or whether at some point it becomes a burden and raises administrative costs and challenges (forgetting the risk for a moment).
But on the other hand, a proposal like Geithner’s would at some level question the very fundamental basis on which every business is run – to parody a key accounting concept, the “growing concern” basis. Further, even if banks do manage to “shrink and separate” on paper, you can be sure that there will be room enough to manoeuvre control from the back door.
If not explicit caps on size, I think there should be enough disincentive created for incremental size or business to control the risk. Yes, no one can predict black swans – if we could, we wouldn’t let them swim around. But if there is anything that can be done to minimize the effects of their occurrence, lets do it. Maybe Dimon’s expanded resolution authority could be the answer after all!
PS: and now comes the news that Jamie Dimon is being discussed as a potential successor to Tim Geithner!