Betting Big: Value, Caution and Accountability in an Era of Large Banks and Complex Finance

31 Review of Banking & Financial Law, Forthcoming, October 2012

59 Pages Posted: 5 Apr 2010 Last revised: 21 Dec 2014

Lawrence G. Baxter

Duke Law School

Date Written: May 25, 2012

Abstract

Big banks are controversial. Their supporters maintain that they offer products, services and infrastructure that smaller banks simply cannot match and enjoy unprecedented economies of scale and scope. Detractors worry about the risks generated by big banks, their threats to financial stability, and the way they externalize costs of operation to the public. This article explains why there is no conclusive argument one way or the other and why simple measures for restricting the danger of big banks are neither plausible nor effective.

The complex ecology of modern finance and the management and regulatory challenges generated by ultra-large banking, however, cast serious doubt on the proposition that the benefits of big banking outweigh its risks. Consequently, two general principles are proposed for further consideration. First, big banks should bear a greater degree of public accountability by reforming certain principles of corporate governance to require greater representation of public interests at the board and executive levels of big banks. Second, given the unproven promises of performance by big banks, their unimpressive actual record of performance, and the many hazards they inevitably generate or encounter, financial regulators should consciously adopt a strict cautionary approach. Under this approach, big banks would bear a very heavy onus to demonstrate in concrete terms that their continued growth – and even the maintenance of their current scale – can be adequately managed and supervised.

Keywords: banking law, regulatory reform, federal reserve system, too-big-to-fail, law and economics

JEL Classification: E5

Suggested Citation

Baxter, Lawrence G., Betting Big: Value, Caution and Accountability in an Era of Large Banks and Complex Finance (May 25, 2012). 31 Review of Banking & Financial Law, Forthcoming, October 2012. Available at SSRN: https://ssrn.com/abstract=1582453 or http://dx.doi.org/10.2139/ssrn.1582453

Lawrence G. Baxter (Contact Author)

Duke Law School ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-8540 (Phone)

HOME PAGE: http://www.law.duke.edu/fac/baxter/

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