The UK Government is Right to Listen to Claims that Large Banks should be Broken up - Essay Example

Introduction Banks aren’t most admired in the best of times even, but the rage of recent years is unparalleled. This understandable anger has ignited the imprudent idea that we should break up the largest banks of the nation (Harper & Arora 2005) This argument is easy and readily respondent. Before the crisis period, voracious bankers used their political power to grow from minute, particular banks into humongous, all-purpose financial firms. This metamorphosis led to financial catastrophe because sometimes banks became too huge to administer and too big to not pass. If we break the banks up, we will eradicate the future crisis risk (Rogers 1999). The impediment is that every niche of this argument is based on a myth. The first misleading notion is that the materialization of huge, universal banks- uniting investment banking with commercial banking- was an unnatural or artificial development. This disjointed market means that banks could not accomplish the economies of scale or simply supply clients on a global or national level. The market needs stimulated the consolidation and gave birth to an evolution towards greater competency in the banking sector. (Banks 2007) A second erroneous belief is that these universal, large institutions were primarily to give guilt for financial crisis. As most grave observers recognize, an amalgamation of risk management and bad lending by poor regulation, bank management and poor-advised consumer performance all played a role. A third misleading notion is that huge financial institutions have become too intricate to supervise. A firm of any size needs strong management and control to supervise complication. In reality, big global institutions have frequently proved more elastic than others because their expansion in business model makes sure that loss in one department of enterprise can be stifled by revenues in other departments of the organization. In some instances, intricacy can be a remedy to risk, instead of a reason of it. (Duffie 2011) The opponents of huge banks that are seldom aired similar to they don’t qualify for examination. Critics point to the excessive influence huge banks mostly has on the political procedures. They panic that those regulators are intimidated by a big bank’s power and position. These opponents appear to consider that regulators are not capable of coming up with independent verdicts. In the practical world, this instance is not true. That supposed, it is genuinely right and mandatory for politicians and regulators to employ with industry and experts practitioners to be trained about these issues. These regulators are not browbeaten, but they usually do require more capability and improved cooperation with each other to take on the tasks lucratively (Duffie 2011). Another condemnation is that huge banks receive large, implied subsidies from government and can borrow money more reasonably because they are considered to ‘too big to fail’. But the facts don’t stay out. Big banks invest billions of dollars to bring services and products want, investments that a firm has accomplished scale can make. The scale permits them to carry, like huge-box stores, more invention, more consistent and convenience, dependent service (Wilson 2012). Breaching the huge banks would damage their clients, customers, and the economy as a well. In actuality, it would insert novel risks into the financial arena. If the globalized, multifunctional, universal banks are obligated back into dedicated lending firs, they will require figuring out novel ways to give the returns to shareholders. This could easily lead the way to an augmentation in risk lending. Most of the banks in United Kingdom function all over the globe and have to function with international banks. If they are not able to work with banks in UK, they will then work with banks based abroad. Giving those businesses to different countries would absolutely harm the national competitiveness, economic vivacity, creation of job and the clients who need a choice of financial services. The greatest strength of UK is that it has the hugest, propounded, and effective capital markets in the entire world which it cannot lose what so ever. (Carney 2006) According to George Osborne, big banks shouldn’t be broken up in Britain as he says that these are the biggest lenders who are valuable to society. He said to the Commission on Banking Standards that if we forcefully broke down all of the big banks, he isn’t sure the society would take advantage of it. The Chancellor argued that forcefully breaking down all the banks would do little or no benefit to the government of UK and the so-called “ring fence” would force all banks to segregate the much riskier system of investment banking from the retain arm they possess to make the financial system a much safer place. (STERN, G. H., & FELDMAN, R. J. (2004) He adds to his statement that as a society, they don’t have many banks. He also said that the work has been done by many political parties and it is at the point of acceptance. Many members of Commission are in favor of breakdown of huge banks, including the ex-Chancellor, Lord Lawson. The large, inter connective system of banking is bolstered by powerful, and large interconnected banks (Wilson 2012). The crisis that the Government faced in 2008 explains the impediment with huge inter connective system of banking. Huge banks develop diversified, inter connected, and large balance sheets as part of shock absorber. The normal circumstances say that a negative shock such as hedge fund failure if happens, would result in losses which are incurred and are primarily shared in the financial system by a number of different creditors, also those with smaller losses can be easily absorbed than the ones by a single creditor, who can be pushed to evasion to different creditors. But, in large shock case, such as the failure of hugest bank such as Lehman Brothers, the inter-connective network can easily augment this shock and also ignite the whole system to fire (Duffie 2011). Andrew Haldane wrote in his book that the interconnected networks show a tipping point, a property, or a knife-edge. In a specific range, these connections are a shock-absorber. This system points to a joint insurance device which have dissipated and dispersed disturbances. But, after a certain specified range, this system can tip over the erroneous side of this knife-edge. Interconnections do serve as losses flow, or amplifiers of shock but not as dampeners. This system thus cannot act as a mutual insurance device but functions as a mutual incendiary device. (Haldane et al 2004) In the following years, Daron proposed the notion the when dense connections are present they gave the premise that huge negative shocks spread to this entire financial system. On the contrary, weak connections’ shocks remained confined to their original track. This propels Osborne’s idea and proposes that huge banks are a risk to an intense inter-connective financial system (Acemoglu 2009). A free market system negates the vivacious liquidation arriving from crash of too-big-to-fail megabank as it serves as a warning signal. These huge inter-connective banks are marked as risky counterparties. This banking system should be either able to regulate itseld ot hinder the banks from becoming too inter connected or narrow banking and thus gives the non-tax payer funded the insurance of liquidity in any case of systematic risk and also accept the actuality of huge scale- liquiditionary crashes pertaining (Haldane et al 2004). Conclusion Overall the system we have is the one Japan is living in for a time period of twenty years. These bailouts hinder liquidation and there are no genuine disincentives. Hence, as we know capitalism without failure is a myth so are banks without failure. These bailed out banking sectors are too big to fail and are liquidity sucking vampires dependent on injections and bailouts. (Wilson 2012). This is absolutely correct. Take each of the points one by one. Should the huge banks of the country be permitted to sell their branches? Yes, they should be allowed. The acquisitions and mergers and bank failures during 2007-2009 have left United Kingdom with an oligopolistic economy. This implies lesser competition and a weaker deal for borrowers as well as savers, also a much lesser capability for corporate lending of this capital. A market which is badly spoiled and rotten is which a banking sector lives in. The surmountable competition and the rightly funded institutions are mandatory for all of us (Mayo 2012). May be the best way out is to cut down the sizes of banks. But it is ambiguous as to what affect would a huge regulatory cleaver would have on the huge banks of the nation. Influential regulator have been on the urge to bolster and further inaugurate the idea of big banks broken down because they perceive them as their competitors because big banks do survive most of the economic downturns and live their way out. They do come out of the thunderstorm of economic depression as they practice economies of scale and are better able to recover their costs. In my opinion, the UK Government is not right to listen to these fortuitous claims that these large banks should be broken up because these banks are assets to society (Acemoglu 2009). Bibliography ACEMOGLU, D. (2009). Introduction to modern economic growth. Princeton, Princeton University Press. BANKS, RAY.(2007) The big blind. Rockville, Md: PointBlank. CARNEY, T. P. (2006). The big ripoff: how big business and big government steal your money. Hoboken, N.J., J. Wiley & Sons. DUFFIE, D. (2011). How big banks fail and what to do about it. Princeton, N.J., Princeton University Press. Top of Form HALDANE, A. G., IRWIN, G., & SAPORTA, V. (2004). Bail out or work out?: theoretical considerations. London, Bank of England. Bottom of Form HARPER, M., & ARORA, S. S. (2005). Small customers, big market: commercial banks in microfinance. Warwickshire, UK, ITDG Pub. MAYO, M. (2012). Exile on Wall Street: one analyst's fight to save the big banks from themselves. Hoboken, N.J., John Wiley & Sons, Inc. ROGERS, D. (1999). The big four British banks: organization, strategy and the future. New York, St. Martin's Press. STERN, G. H., & FELDMAN, R. J. (2004). Too big to fail: the hazards of bank bailouts. Washington, D.C., Brookings Institution Press. WILSON, H (21 November, 2012). Big banks are good for society, says George Osborne. [online] The Telegraph. Available at http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9694634/Big-banks-are-good-for-society-says-George-Osborne.html. [Accessed 7 December 2012] Read More