Are Banks Too Large? Maybe, Maybe Not

By Luc Laeven, Lev Ratnovski, and Hui Tong

Large banks were at the center of the recent financial crisis. The public dismay at costly but necessary bailouts of “too-big-to-fail” banks has triggered an active debate on the optimal size and range of activities of banks.

But this debate remains inconclusive, in part because the economics of an “optimal” bank size is far from clear. Our recent study tries to fill this gap by summarizing what we know about large banks using data for a large cross-section of banking firms in 52 countries.

We find that while large banks are riskier, and create most of the systemic risk in the financial system, it is difficult to determine an “optimal” bank size. In this setting, we find that the best policy option may not be outright restrictions on bank size, but capital—requiring  large banks to hold more capital—and better bank resolution and governance.

Continue reading “Are Banks Too Large? Maybe, Maybe Not” »

From Rabat to Amman

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By Christine Lagarde

(Version in عربي  and Français)

Earlier this week, the first stop on my Middle East and North Africa trip was Morocco, which displayed its legendary hospitality and kindness. Located at the crossroads of Africa, Europe, and the Middle East, the country holds so much promise as a dynamic hub for the region.

Morocco has remained a model of stability despite a challenging environment—the economic crisis in Europe, political transition in Arab countries, and more. Throughout all this, the economy has proved resilient, and serious reforms are under way. Continue reading “From Rabat to Amman” »

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