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April 8, 2013

Why Rescue Fragile Banks? Outsource Them Instead

Executives of the largest U.S. banks warn that efforts to make the financial system safer will harm their global competitiveness. They conjure a world in which foreign institutions, supported by government subsidies, dominate the business of providing banking services to multinational corporations.

My response: Great idea. Let’s outsource fragile banking.

Large as they are, institutions such as Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM)aren’t the primary source of U.S. dominance in the global financial-services industry. The country’s real advantage is in asset management. At the end of 2011, hedge funds, mutual funds and other U.S. institutions managed about $33 trillion in assets around the world, more than three times the amount commanded by the six largest U.S. banks. The asset managers’ activities support domestic and global growth, distribute risk and reinforce market discipline.

The banks differ from the asset managers largely in the risk they pose to the broader economy. The sheer complexity of their operations, and their penchant for using large amounts of debt to fund their business, make them “systemically important” and necessitate taxpayer bailouts when they get into trouble. In other words, they concentrate risk, rather than distribute it, and extract a very high price from taxpayers for whatever role they play in supporting growth.”

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Read full Bloomberg article here

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