Eurobanking

Arnold,

I understand the point about size you make, but what about the Canadian banking system? It is a highly concentrated banking system too and not only done better recently buy historically (e.g. zero banks shut down during the Great Depression).

David beat me to the Canadian question!

While I tend to agree with Arnold about banks, I don't think the *size* of banks matters much. The UK had to bail out some little banks, IIRC, because the banks were "too correlated to fail". If 100 banks are all doing exactly the same thing (and they often tend to) then it doesn't make any difference if it's one big bank doing that same thing.

Any bank is an accident waiting to happen, almost by definition of a "bank", as an entity that borrows long and lends short. Why we have banks (why not stock and bond markets?); and why banks are so tied up in the monetary system (why not write cheques on our stock and bond mutual funds?), are the questions.

Ooops! I meant "borrows short and lends long". I just defined an anti-bank.

That's a really good post. Shin's work is consistent with that of Friedman in Engineering the Financial Crisis concerning the role of Basel II's risk weighting in steering capital to certain sectors. He also is alert to the role of European banks in the "shadow banking" sector in the US. If you recall the SEC suit against Goldman, all the buyers of the supposedly evil securitization were European, and one might have wondered, why? Of course, it is Basel II as much as anything. As well, the financial sector is a larger proportion of the Eurozone economies than in the US; the banks are much worse capitalized (blame Basel II again) and state ownership of banks is much broader.

An airplane in flight is an accident waiting to happen. Riding a bicycle meann maintaining a precarious balance. There are people that are too scared to ever fly or too scared to ever ride a bicycle. Borrowing short to lend long is not really that different.