George Selgin: belief

Transcript context

…Say we hadn’t had, or hadn’t kept, deposit insurance, and we move forward into a world where there’re five or six big banks, not many small banks. Banks are capitalized at 40 percent. The cost of capital is higher — is that really better for this country? I don’t think that that kind of concentration would’ve been better, but let’s be careful. That kind of concentration wasn’t just a consequence of letting banks branch. I have an article about this. In Canada, they had strict entry requirements. What happened is that, especially starting in the 1920s, the number of Canadian banks shrank, and the authorities wouldn’t allow any new ones to be formed. It wasn’t just branch banking — the freedom for banks to branch — that resulted in all this consolidation. It was absolute entry restrictions that were imposed by regulation. I think that the question one really wants to ask is, what would a banking system look like if you let banks be free to consolidate, branch, and group or whatever on their own, but you also had no guarantees, no too-big-to-fail — which of course drives a lot of consolidation itself and no absolute entry restrictions, freedom of entry. I don’t think you would have so concentrated a banking system as we’ve seen now in Canada and some other places. I also think there would be room for some small banks still, because small banks have their specialties. Among the big branch banks, I think you would also have survival of some small banks. If the main thing you want is security for your deposit, access to the payment system, and because of our Constitution, Congress cannot really pre-commit to no big bank bailouts — however much you or I might want them to, they can’t; there’s sovereignty embedded in our institutions — I would just keep on putting my money in a big bank, even under what might nominally appear to be laissez-faire, because I would figure ex-post, they’ll be bailed out — the smaller banks maybe not — and we’d end up with five or six dominant banks. Maybe that would be better, but I don’t think it would actually be truly competitive either.…

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