What’s wrong with Big?

On Friday I mentioned that the “too big to fail” doctrine could seriously fail to deliver the kinds of financial services we need in a dynamic economy because when banks act like utilities, they just don’t keep up with changing times.

There’s another reason that the big banks have problems: conflict.

Not the kind of conflict where boss tells the line worker that his tie isn’t right. No the conflicts of interest that inevitably arise when a bank becomes a financial supermarket.

For example, what happens when a bank has a corporate client with a depository relationship, a book of bank loans, a corporate pension, and a stock underwriter? It may help the company get lower fees, but who’s gonna give the bad news when the stock analyst wants to downgrade the shares? What happens when the pension fund underperforms? Does the bank offer better CD rates to keep the business?

Bigger banks offer many more opportunities for conflicts of interest. These conflicts aren’t just uncomfortable. They lead to economic inefficiencies that can waste billions of dollars.

Douglas R. Tengdin, CFA
Chief Investment Officer
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