Question

2. Consider whether the US government should break up the biggest US banks. Why or why not? If the United States does so, and other nations have very large government banks, or have very large private banks, can US banks remain competitive?

Answer 1

Answer :

Breaking of Biggest US banks into smaller ones has its own advantages and disadvantages:

Advantages:

1) If a bank is not too large, it would not threaten the financial system in case of financial crisis. It will not be termed as "too big to fail"

2) No more bailout packages are needed which means less burden for the government and hence would benefit the overall system.

3) Breaking the banks into smaller ones will increase the competition in the market and hence will create a better market prospect for the consumers.

However, creating the smaller banks out of larger ones have its own challenges or disadvantages when compared to other nations who have large government or private banks. Some of them are listed below:

1) The banking system is the regulated one and in the regulated market space a player grows big and have larger market share only if it serves the needs of the consumers well. Now further hammering it to smaller one would impact the existing balance of the best performing players in the market.

2) Breaking the banks into smaller ones would impact their profit margins (Reduced) which will further dent its prospects and would make it difficult for them to generate market returns which investors care about and hence would make it difficult for the bank to generate money from the market.

3) Making smaller banks out of larger ones would also limit their ability to expand globally and to perform on the global front as the other larger players would always have a fair advantage then them.