An alarming Bank for International Settlements report tells us that the implicit guarantees by taxpayers have actually driven the growth of banks. Those guarantees are underpinned by the banks' "too big to fail" status, which ensures that every time they lose billions of dollars and look like going out of business, governments will prop them up with taxpayers' money.
The report says that smaller banks can enjoy economies of scale but that "diseconomies set in" for the larger unwieldy banks, the ones that governments deem to be "too big to fail".
More to the point, the report suggests that the banks expanded to become "too big to fail" in order to ensure their survival which leaves the global economy in a more vulnerable state.
"There is scant evidence for economies of scale within large internationally active banks,'' the report says. "However, certain banks may have expanded, either domestically or internationally, with the aim of attaining a too-big-to-fail status. Such a status increases moral hazard and weakens market monitoring of risk-taking, which benefits individual firms but distorts economic incentives and renders the financial system more fragile."
The banks would have embarked on this strategy in the lead up to the global financial crisis. The bailouts and assistance were all part of their master plan.
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