In a recent McKinsey Quarterly interview, the renowned economist Kenneth Rogoff, when asked “Is the size of the banks an important factor?”, said, “I believe that size is overrated as the issue….we take one big bank and break it up into ten smaller banks that act similarly, I’m not sure how much we really would have bought ourselves.”
In other words, Professor Rogoff believes that as long as banks continue to behave as a herd, it does not matter, if individual banks are small or large.
Virtually at the same time, MarketWatch reported Boston Federal Reserve Bank President Eric Rosengren as saying "Some significant challenges remain to be addressed if we are to have a global banking system in which no institution is "too big to fail" given the collateral damage its disorderly demise would cause to economies and citizens,"
While there seems to be a differing opinion about the subject amongst these two highly reputed and respected individuals, evidence seems to suggest that Mr. Rosengren’s stance as carrying more weight. We believe that there is too much of concentration of economic power in the hands of a few financial institutions.
Here we would like to draw the readers’ attention to a recent research report by another highly respected institution, ETH Zurich. In a recent paper on network analysis based on an exhaustive study of 43060 TNCs identified according to the OECD definition, taken from a sample of about 30 million economic actors, it was found that “nearly 4/10th of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations. A relevant additional fact at this point is that 3/4th of the core are financial intermediaries.”
In other words, the above research says that 40% of global economic value for TNCs is controlled by just 147 super-entities and that 75% of these super-entities are financial firms.
This is indeed too significant an economic concentration to allow global markets to function in a free and fair manner. Unless regulators and governments take corrective action to ensure fair competition and allocation of resources within and among industries, this skewed economic power structure will continue to be a common cause for repetitive economic crisis.