Ben Bernanke, chairman of the Federal Reserve, has stayed carefully on the sidelines while
a major argument has broken out among and around senior policymaking circles: Should our biggest banks be broken up, or can they be safely re-regulated into permanently good behavior? (See the recent competing answers from
WSJ,
FT, and the
New Republic).
But the issues are too pressing and the stakes are too high for key economic policymakers to remain silent or not have an opinion. On Cape Cod last Friday, Mr. Bernanke appeared to lean towards the banking industry status quo, arguing that regulation would allow us to keep the benefits of large complex financial institutions.
Note, however, that Bernanke's quote making this point in the NPR story (at the 45 second mark) is from his spoken remarks; the prepared speech does not contain any such language. And Mr. Bernanke is wise to be wary of endorsing the benefits of size in the banking sector – the evidence in this regard is shaky at best.
There are three main types of evidence: findings from academic research on the returns to size in banking; current and likely future policy in other countries; and actual practices in the banking industry.
First, while academic research is not always the primary driver of policy choices, it is relevant when we can readily see the costs of big banks (in the crisis around us) but the supporters of those banks claim they bring important benefits. In fact, the available research indicates that in the banking sector, economies of scale exist only up to a (relatively low) level of total assets, while economies of scope are elusive.
