Question

Can the U.S. economy function successfully without big banks? Why or why not?

Answer 1

No it can't. There may be other large financial institutions to meet demands of corporate sectoral. Corporate sector is quite large and so is its demand for loans. It can't be satisfied by small banks. But small banks can meet short term loans and financial institutions can meet long term and medium term needs quite well. But even then the short term demand for funds is substantial and small banks may leave much to be desired. Further they are quite inefficient and can't attain economies of scale. They have to borrow funds at higher rate to meet contingencies and thus their cost of operations will be quite large. Also small banks will not have nation wide branches and international branches. Corporate sector can't find appropriate finance in such condition particularly to finance interstate and international trade. Neither these banks will have enough information to reduce problem of moral hazard and adverse selection. They will have less advantage compared to individuals and individuals will prefer their own financial transactions.