Tuesday, May 3rd, 2016 2:22 pm

Breaking Up Banks

Question A: The four largest domestic US banks currently have around 40% of the industry’s domestic assets (an average of 10% each).  In early 1998, before Glass-Steagall ended and before Citicorp merged with Travelers, they held 13.2% (an average of 3.3% each). Thirty years ago, before interstate branching was fully permitted, that combined share was around 8% (an average of 2% each).
Capping US banks’ size so that no single bank could be larger than 4% of the sector's domestic assets would lower systemic risk in the US.

Responses
 

Source: IGM Economic Experts Panel
www.igmchicago.org/igm-economic-experts-panel

Responses weighted by each expert's confidence

Source: IGM Economic Experts Panel
www.igmchicago.org/igm-economic-experts-panel

Question B: The US financial system would contribute more to the average American's welfare if the size of US banks were capped so that none could be larger than 4% of the sector's domestic assets.

Responses
 

Source: IGM Economic Experts Panel
www.igmchicago.org/igm-economic-experts-panel

Responses weighted by each expert's confidence

Source: IGM Economic Experts Panel
www.igmchicago.org/igm-economic-experts-panel

Question A Participant Responses

Participant University Vote Confidence Comment Bio/Vote History
Acemoglu Daron Acemoglu MIT Agree 6
Political connections and systemic effects of risktaking make concentration in finance likely more pernicious than elsewhere. 4% a ?
Bio/Vote History
         
Alesina Alberto Alesina Harvard Did Not Answer
Bio/Vote History
         
Altonji Joseph Altonji Yale Did Not Answer
Bio/Vote History
         
Auerbach Alan Auerbach Berkeley Agree 3
Bio/Vote History
         
Autor David Autor MIT Agree 3
Bio/Vote History
         
Baicker Katherine Baicker Harvard Did Not Answer
Bio/Vote History
         
Banerjee Abhijit Banerjee MIT Agree 6
Bio/Vote History
         
Bertrand Marianne Bertrand Chicago Agree 4
Bio/Vote History
         
Brunnermeier Markus Brunnermeier Princeton Uncertain 6
Trouble makersLehman & Bear Stearns were smaller banks. On the other hand, smaller banks are easier to dissolve & less political influence.
Bio/Vote History
         
Chetty Raj Chetty Stanford Did Not Answer
Bio/Vote History
         
Chevalier Judith Chevalier Yale Uncertain 5
Complicated: size is only one factor.
-see background information here
Bio/Vote History
         
Cutler David Cutler Harvard Disagree 1
Bio/Vote History
         
Deaton Angus Deaton Princeton Disagree 2
Bio/Vote History
         
Duffie Darrell Duffie Stanford Agree 10
But it's not smart. Banning financial firms also lowers fiinancial systemic risk, but does not serve economic welfare. Use capital regs.
Bio/Vote History
         
Edlin Aaron Edlin Berkeley Agree 3
Bio/Vote History
         
Eichengreen Barry Eichengreen Berkeley Agree 5
"Too big to manage" can be a problem. Not the only problem of course. Small banks can also fail, threatening financial stability.
Bio/Vote History
         
Einav Liran Einav Stanford Uncertain 1
Bio/Vote History
         
Fair Ray Fair Yale Agree 7
Bio/Vote History
         
Finkelstein Amy Finkelstein MIT Did Not Answer
Bio/Vote History
         
Goldberg Pinelopi Goldberg Yale Did Not Answer
Bio/Vote History
         
Goolsbee Austan Goolsbee Chicago Uncertain 7
depends how you did it but size alone isn't what's dangerous-it's interconnectedness. And you can't ignore non-bank financial institutions.
Bio/Vote History
         
Greenstone Michael Greenstone Chicago Uncertain 2
too many other factors matter such that question is challenging to answer confidently, e.g., what about capital holding requirements?
Bio/Vote History
         
Hall Robert Hall Stanford Uncertain 7
Systemic risk arises when speedy resolution of insolvency does not occur. With proper non-bailout resolution, big banks are fine.
Bio/Vote History
         
Hart Oliver Hart Harvard Agree 8
With banks being smaller no single bank's failure would lead to serious contagion or undermine the confidence of investors and depositors.
Bio/Vote History
         
Holmström Bengt Holmström MIT Disagree 5
Bio/Vote History
         
Hoxby Caroline Hoxby Stanford Did Not Answer
Bio/Vote History
         
Hoynes Hilary Hoynes Berkeley Uncertain 8
Bio/Vote History
         
Judd Kenneth Judd Stanford Uncertain 7
My worry is that most banks pursue similar business strategies. Many banks doing risky things is no safer than a few banks doing the same.
Bio/Vote History
         
Kaplan Steven Kaplan Chicago Uncertain 3
Very hard and difficult question. Cannot say much without a lot more information.
Bio/Vote History
         
Kashyap Anil Kashyap Chicago Disagree 7
shadow banking risks would grow substantially if we go this route and we already saw that they were at the heart of the last crisis
Bio/Vote History
         
Klenow Pete Klenow Stanford Uncertain 2 Bio/Vote History
         
Levin Jonathan Levin Stanford Uncertain 4
Bio/Vote History
         
Maskin Eric Maskin Harvard Agree 5
Having more and smaller banks would probably increase diversification
Bio/Vote History
         
Nordhaus William Nordhaus Yale Disagree 3
No evidence in favor. Unclear how to do without collateral damage it other than current approach of graduated capital requirements.
Bio/Vote History
         
Saez Emmanuel Saez Berkeley Agree 3
Bio/Vote History
         
Samuelson Larry Samuelson Yale Agree 6
Other alternatives, such as appropriately regulating reserves and leverage, would also be effective.
Bio/Vote History
         
Scheinkman José Scheinkman Princeton Did Not Answer
Bio/Vote History
         
Schmalensee Richard Schmalensee MIT Uncertain 4
The shadow banking system, which is important in this context, would change in response to such a rule, with unknown effects.
Bio/Vote History
         
Shapiro Carl Shapiro Berkeley Did Not Answer
Bio/Vote History
         
Shimer Robert Shimer Chicago Uncertain 3
Bio/Vote History
         
Thaler Richard Thaler Chicago Agree 7
Bio/Vote History
         
Udry Christopher Udry Yale Did Not Answer
Bio/Vote History
         

Question B Participant Responses

Participant University Vote Confidence Comment Bio/Vote History
Acemoglu Daron Acemoglu MIT Uncertain 5
Against the benefits of lower systemic risk there is the loss of business to other financial centers. Global regulation would be better.
Bio/Vote History
         
Alesina Alberto Alesina Harvard Did Not Answer
Bio/Vote History
         
Altonji Joseph Altonji Yale Did Not Answer
Bio/Vote History
         
Auerbach Alan Auerbach Berkeley Disagree 5
Bio/Vote History
         
Autor David Autor MIT Agree 3
Bio/Vote History
         
Baicker Katherine Baicker Harvard Did Not Answer
Bio/Vote History
         
Banerjee Abhijit Banerjee MIT Agree 6
Bio/Vote History
         
Bertrand Marianne Bertrand Chicago Agree 4
Bio/Vote History
         
Brunnermeier Markus Brunnermeier Princeton Uncertain 5
Technology will lead to a reshaping of the financial industry. Some aspect will have scale advantages, others not.
Bio/Vote History
         
Chetty Raj Chetty Stanford Did Not Answer
Bio/Vote History
         
Chevalier Judith Chevalier Yale Uncertain 4
There are clearly some countervailing benefits to size.
Bio/Vote History
         
Cutler David Cutler Harvard Uncertain 1
Bio/Vote History
         
Deaton Angus Deaton Princeton Disagree 2
Bio/Vote History
         
Duffie Darrell Duffie Stanford Disagree 10
A 4% cap might be OK for now, but too low later, causing distortions. Require instead higher minimum capital ratios for larger banks.
Bio/Vote History
         
Edlin Aaron Edlin Berkeley No Opinion
Bio/Vote History
         
Eichengreen Barry Eichengreen Berkeley Agree 5
Size alone confers no benefits to consumers and arguably is one source of costs (those associated with financial instability).
Bio/Vote History
         
Einav Liran Einav Stanford Uncertain 1
Bio/Vote History
         
Fair Ray Fair Yale Agree 4
Bio/Vote History
         
Finkelstein Amy Finkelstein MIT Did Not Answer
Bio/Vote History
         
Goldberg Pinelopi Goldberg Yale Did Not Answer
Bio/Vote History
         
Goolsbee Austan Goolsbee Chicago Disagree 5
Without dealing with shadow banks, this rule alone would mostly drive consumers to non-banks outside the rules.
Bio/Vote History
         
Greenstone Michael Greenstone Chicago Uncertain 2
we are missing decisive evidence on whether benefits of large banks exceed their costs
Bio/Vote History
         
Hall Robert Hall Stanford Uncertain 7
see A
Bio/Vote History
         
Hart Oliver Hart Harvard Uncertain 5
There are benefits of large banks as well as costs. Regulation should include shadow banks and be more flexible than a cap on size.
Bio/Vote History
         
Holmström Bengt Holmström MIT Disagree 6
Bio/Vote History
         
Hoxby Caroline Hoxby Stanford Did Not Answer
Bio/Vote History
         
Hoynes Hilary Hoynes Berkeley Uncertain 8
Bio/Vote History
         
Judd Kenneth Judd Stanford Uncertain 7
I have antitrust concerns. If a bank's 4% is concentrated in one region, then it may have excessive market power.
Bio/Vote History
         
Kaplan Steven Kaplan Chicago Uncertain 9
Banks are large in other countries, suggesting size is a net positive. On the other hand, size was a problem in the financial crisis.
Bio/Vote History
         
Kashyap Anil Kashyap Chicago Uncertain 3
I think there are probably some economies of scale that consumers benefit from, but hard to know how much would be lost from downsizing.
Bio/Vote History
         
Klenow Pete Klenow Stanford Uncertain 2 Bio/Vote History
         
Levin Jonathan Levin Stanford Uncertain 4
Bio/Vote History
         
Maskin Eric Maskin Harvard Disagree 6
There are benefits of bigness that would be lost by breaking up banks. Limiting leverage is a more effective tool
Bio/Vote History
         
Nordhaus William Nordhaus Yale Disagree 3
Same as above.
Bio/Vote History
         
Saez Emmanuel Saez Berkeley Agree 2
Bio/Vote History
         
Samuelson Larry Samuelson Yale Agree 6
Bio/Vote History
         
Scheinkman José Scheinkman Princeton Did Not Answer
Bio/Vote History
         
Schmalensee Richard Schmalensee MIT Agree 4
There would be somewhat more intense competition, which would be beneficial, but there would also be other difficult-to-evaluate effects.
Bio/Vote History
         
Shapiro Carl Shapiro Berkeley Did Not Answer
Bio/Vote History
         
Shimer Robert Shimer Chicago Uncertain 1
Bio/Vote History
         
Thaler Richard Thaler Chicago Uncertain 1
Bio/Vote History
         
Udry Christopher Udry Yale Did Not Answer
Bio/Vote History
         

10 New Economic Experts join the IGM Panel


For the past two years, our expert panelists have been informing the public about the extent to which economists agree or disagree on important public policy issues. This week, we are delighted to announce that we are expanding the IGM Economic Experts Panel to add ten new distinguished economists. Like our other experts, these new panelists have impeccable qualifications to speak on public policy matters, and their names will be familiar to other economists and the media.

To give the public a broad sense of their views on policy issues, each new expert has responded to a selection of 16 statements that our panel had previously addressed. We chose these 16 statements, which cover a wide range of important policy areas, because the original panelists' responses to them were analyzed in a paper comparing the views of our economic experts with those of the American public. You can find that paper, by Paola Sapienza and Luigi Zingales, here. The paper, along with other analyses of the experts' views, was discussed during the American Economic Association annual meetings, and the video can be found here.

The new panelists' responses to these statements can be seen on their individual voting history pages. Our ten new economic experts are:

Abhijit Banerjee (MIT)
Markus K. Brunnermeier (Princeton)
Liran Einav (Stanford)
Amy Finkelstein (MIT)
Oliver Hart (Harvard)
Hilary Hoynes (Berkeley)
Steven N. Kaplan (Chicago)
Larry Samuelson (Yale)
Carl Shapiro (Berkeley)
Robert Shimer (Chicago)


Please note that, for the 16 previous topics on which these new panelists have voted, we left the charts showing the distribution of responses unchanged. Those charts reflect the responses that our original panelists gave at the time, and we have not altered them to reflect the views of the new experts.

We have also taken this opportunity to ask our original panelists whether they would vote differently on any of the statements we have asked about in the past. Several experts chose to highlight statements to which they would currently respond differently. In such cases, you will see this "revote" below the panelist's original vote. We think you will enjoy seeing examples of statements on which some experts have reconsidered.

As with the 16 previous statements voted on by new panelists, these "revote" responses are not reflected in the chart that we display showing the distribution of views for that topic: all the charts for previous questions reflect the distribution of views that the experts expressed when the statement was originally posed.

About the IGM Economic Experts Panel

This panel explores the extent to which economists agree or disagree on major public policy issues. To assess such beliefs we assembled this panel of expert economists. Statistics teaches that a sample of (say) 40 opinions will be adequate to reflect a broader population if the sample is representative of that population.

To that end, our panel was chosen to include distinguished experts with a keen interest in public policy from the major areas of economics, to be geographically diverse, and to include Democrats, Republicans and Independents as well as older and younger scholars. The panel members are all senior faculty at the most elite research universities in the United States. The panel includes Nobel Laureates, John Bates Clark Medalists, fellows of the Econometric society, past Presidents of both the American Economics Association and American Finance Association, past Democratic and Republican members of the President's Council of Economics, and past and current editors of the leading journals in the profession. This selection process has the advantage of not only providing a set of panelists whose names will be familiar to other economists and the media, but also delivers a group with impeccable qualifications to speak on public policy matters.

Finally, it is important to explain one aspect of our voting process. In some instances a panelist may neither agree nor disagree with a statement, and there can be two very different reasons for this. One case occurs when an economist is an expert on a topic and yet sees the evidence on the exact claim at hand as ambiguous. In such cases our panelists vote "uncertain". A second case relates to statements on topics so far removed from the economist's expertise that he or she feels unqualified to vote. In this case, our panelists vote "no opinion".

The Economic Experts Panel questions are emailed individually to the members of the panel, and each responds electronically at his or her convenience. Panelists may consult whatever resources they like before answering.

Members of the public are free to suggest questions (see link below), and the panelists suggest many themselves. Members of the IGM faculty are responsible for deciding the final version of each week’s question. We usually send a draft of the question to the panel in advance, and invite them to point out problems with the wording if they see any. In response, we typically receive a handful of suggested clarifications from individual experts. This process helps us to spot inconsistencies, and to reduce vagueness or problems of interpretation.

The panel data are copyrighted by the Initiative on Global Markets and are being analyzed for an article to appear in a leading peer-reviewed journal.

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