WE are most likely to see the emergence of another large bank in Malaysia. Bank Negara Malaysia has given the approval for CIMB Bank, RHB Capital and Malaysia Building Society Bhd (MBSB) to explore the possibility of a merger. Although this will not be the first time banks are seeking merger partners in Malaysia, it has, somewhat, reignited the debate whether size, for a bank that is, does matter.
The issue remains inconclusive to this day and we possibly will never arrive at an agreed optimal size for a bank. But the animal kingdom may shed some light. Consider for a while what biologist J.B.S. Haldane wrote in 1928 — that based on his observations, if we drop a mouse down a thousand-yard mine shaft, it will likely walk away unscathed. A rat would be killed, a man would be broken and a horse would explode in a splash.
In the banking world, several big banks went down the “mine shaft” in 2008 and the magnitude of the splashes almost brought the world to its knees. Ultimately, Haldane concludes that, at least in the animal kingdom, the physiology of what is being dropped into the shaft has a lot to do with whether it survives the fall. In the organisational world, we call it structure.
The collapse of several banks following damning revelations at global financial house Lehman Brothers in 2008 is still fresh on everyone’s mind. Almost all of those banks were household names in their heyday, while others required expensive bailouts as they were perceived as being too big to be allowed to fail. Such costly bailouts dismayed the public and, until now, no one is certain whether society’s feelings towards the big banks have changed.
But others have thrown their weight behind the idea of having more big banks, perhaps the most influential being the International Monetary Fund (IMF) itself. Central to the IMF’s support has been the costs advantage bigger banks tend to enjoy compared with their smaller counterparts.
In a study, the Bretton Woods institution found that large banks in the United States received a funding advantage of as much as US$70 billion (RM223 billion) between 2011 and 2012 as investors demanded lower interest rates because of a perception the government wouldn’t let such firms fail during turbulent times. Globally, big banks in the euro area received up to US$300 billion in funding costs advantages during that period, Banks in Japan got from US$25 billion to US$110 billion and US$20 billion to US$110 billion in the UK, another study shows.
A question, however, surfaced about sources of the funding advantage big banks enjoy. Studies indicate a somewhat worrying trend, that big banks are more likely to get themselves involved in market-based activities that are inherently riskier, although whether or not they present greater systemic risks to the financial system depends, too, on whether they are sufficiently capitalised and with stable sources of funding.
For Bank Negara, airtight regulations would be required given the high degree of systemic risks big banks present. Traditional banking regulations may not be sufficient.
Some analysts are suggesting that perhaps a systemic risk-based regulation would be required for big banks as the usual prudential management regulation may not fully reflect the systemic risks that comes with large banks’ appetite for market risk-taking. Moreover, the traditional prudential management requirements may overlook the distortions associated with big banks’ involvement in such activities.
Then there is always the social perspective. How big should banks be allowed to become? The answer perhaps lies in banking regulators’ monitoring on the sizes and overall health of such banks against the potential systemic risks they may present and then to put such elements in a balance against the potential benefits big banks offer to society.
That will be easier said than done, for we don’t know much about the value big banks bring to their customers. No matter how strong an argument we may present against having big banks in our midst, the potential for economies of scale in such banks, which in the longer term translates into potential benefits for customers and society in general, cannot be dismissed.
Hence, no one may as yet say that Bank Negara’s decision to allow the three financial institutions to start merger talks among themselves was a perilous move. By the same token, no one should be celebrating at this early stage of the talks to herald the emergence of another big bank in Malaysia. We will just have to wait, see, and hope for the best.