The crisis of large financial institutions challenges traditional viewpoints

Wang Shengbon members of the Basel Committee policy Development Working Group The academic circles explain the improvement of the operation efficiency of large financial institutions from the angles of scale economy, scope economy and market efficiency. The crisis has challenged these traditional understandings before the global financial crisis, and the global banking system has become more concentrated.　　At the end of 2006, the world's largest 5 banks, the largest 10 banks, the largest 20 banks and the largest 100 banks accounted for 15.4%, 26.1%, 41% and 77.3% of the total assets of the global banking system, playing an increasingly important role in global credit markets.　　At the same time, the profitability of large commercial banks, expressed in return on equity (ROE), has increased, with Roe up to 17.56%, 19.86%, 22.7%, 23.37% and 20.02% per cent of the world's top 1000 banks reaching unprecedented levels in 2003-2007 years. The academic circles explain the improvement of the operation efficiency of large financial institutions from the angles of scale economy, scope economy and market efficiency.　　In this crisis, the crisis of large financial institutions not only directly endanger the stability of the global financial system, and the real economy dragged into the brink of recession, the traditional understanding of these questions. The first is economies of scale. Economics defines economies of scale as increasing returns on scale, which refers to the decline in the average cost of the long term due to the expansion of production scale. As the credit intermediary and payment intermediary of the whole society, Commercial Bank has the scale economy mainly from two aspects: first, with the increasing complexity of the banking information system, the fixed transaction cost is obviously rising, the expansion of business scale helps to reduce the unit transaction cost, and the other is to overcome the potential moral hazard of asymmetric information　　The Commercial bank must undertake the high information search and the analysis cost, establishes the strict beforehand screening and afterwards supervises the mechanism, the business scale expansion has diluted the management operation cost. The huge external costs associated with the collapse of large financial institutions during the crisis show the pure financial index such as ROE can not effectively reflect the characteristics of "business risk" of the commercial Bank, which reflects the benefits of the large banks taking risks, but does not fully reflect the risk cost, because the risk is long concealed by the rapid expansion of financial assets.　　Eventually emerged in the extreme form of the financial crisis.　　Other studies show that before the crisis, the rise of Roe in the large banks of Europe and America mainly benefited from the high leverage and the pricing power brought by market authority, not mainly by the increase of operating efficiency. The second is the scope of the economy.　　This can be simply understood as the increase in production activity dimensions (horizontal expansion of production range) resulting in increased benefits (profit rise or cost decline). The scope economy is the theoretical basis of the "universal Bank" model in recent years. First, the cost advantage-----------------------------------------------------------------, the expansion of business scope is helpful to realize the maximization of information value and the third is the advantage of asset combination--through the combination and reconstruction of different financial products, overcome the disadvantage of poor adaptability of single product. During the crisis, it was the large and complex banks that suffered significant losses, while traditional credit-oriented banks showed a strong risk-resistant capability. The sharp contrast shows that, with the increasing participation in the capital market business, the advantages of commercial banks in the field of information, technology and risk management in traditional credit are gradually lost; the decentralized effect of expanding business scope, while helping to reduce the individual risk of banks, still faces systemic risks,　　And as a handful of large, complex banks dominate global financial markets, the homogeneity of the entire banking system is enhanced to become more pervasive and paralysed; complex organizational structures make the growing cost of coordination at some point more than ever-falling gains. Again, market efficiency. The view is that large global financial institutions can reduce financial transaction costs relative to small financial institutions, thereby increasing market efficiency.　　This is mainly attributable to the strong capital base of large banks, expertise and the ability to bear the costs of technology and risk management systems.　　However, the business activities of the large and complex financial institutions in the past 30 years have directly promoted the rapid expansion of the financial assets scale, created huge liquidity, increased the degree of economic virtualization, enlarged the imbalance between the real economy and the financial system, and planted a hidden danger for the global crisis. In the current crisis, it was the collapse of large, complex financial institutions that spread the impact of the crisis on all corners of the globe, precisely those sophisticated structured financial instruments that were so ingenious and seemingly effective in matching the liquidity, risks and benefits of different market subjects. While it is not possible to deny the positive effects of large financial institutions on market efficiency, the crisis warns that we should be more cautious and more fully aware of the proposition.