October 08, 2009

Back in the 1980's, during one of several merger frenzies in the banking industry, I was talking with one of my economics professors about the trend toward fewer and larger banks. Although I thought of this as a worrisome development, my professor assured me that it was merely the market's squeezing inefficiency out of the system. "What good," he asked, "does it do to have so many banks, each with its own army of junior vice presidents?"

We now have an answer to that question, as well as to the premise on which it relies. While it is true that there is duplication of functions and personnel when there are many banks, having larger numbers of smaller banks reduces the likelihood that any bank will achieve that now-infamous status: Too Big to Fail.